5) You’re considering investing in a project with the following characteristics:
ID: 2653523 • Letter: 5
Question
5) You’re considering investing in a project with the following characteristics:
The investment of $400 can be depreciated to zero book value over 10 years.
EBITDA in year 1 is equal to $100, and from there on is expected to grow at 5% per year, every year, forever.
NWC requirements are $100 in year 0, and expected to remain constant forever.
The discount rate for all cash flows is constant and equal to 20% per year.
Compute the NPV of the project if the tax rate is 0% per year. Is the IRR in this case higher or lower than 20%?
Compute the NPV of the project if the tax rate is 40% per year. Is the IRR in this case higher or lower than 20%?
Explanation / Answer
when tax rate is 0%
when tax rate is 40%
Year EBITDA Dep% Depreciation profit after dep Tax benefits from Depreciation Working capital Cash flow NPV at 20% 0 400 100 (500) (500) 1 100 10.00% 40 60 - 60 50 2 105 10.00% 40 65 - 65 45 3 110 10.00% 40 70 - 70 41 4 116 10.00% 40 76 - 76 37 5 122 10.00% 40 82 - 82 33 6 128 10.00% 40 88 - 88 29 7 134 10.00% 40 94 - 94 26 8 141 10.00% 40 101 - 101 23 9 148 10.00% 40 108 - 108 21 10 155 10.00% 40 115 - 100 115 19 NPV (176) IRR 9.93%Related Questions
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