Epiphany Industries is considering a new capital budgeting project that will las

Question

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects ear Sales (Revenues) 100,000 100,000 100,000 Cost of Goods Sold (50% of Sales) 0,000 0,000 0,000 The com pany's marginal tax rate is 35%. The equipment needed would cost $90,000 right now and investments into working capital is expected to increase by $5,000 immediately. The machine will be depreciated using 4 year MACRS. Assume that the machine will be sold for $10,000 at the end of year 3 and the working capital investments can be recovered at the end of the project as well. Year 2 Depreciation 33.33 44.45 14.81 7.41 30. Estimate the free cash flows for the project (16 points) ear Sales (Revenues Cost of Goods Sold (50% of Sales epreciation BIT axes nlevered Net Income epreciation orking Capital urchase of the machine Salvage Value et Free Cash Flow 31. Calculate NPV and IRR (4 points)

Explanation / Answer

NPV = $19626

IRR:

At 25%, NPV = $209.1308

At 26%, NPV = -$1022.54

For 1% increase in rate, NPV decreases by $1231.6708 (209.1308+1022.54) ? For how much increase in ratre, NPV decreases by $209.1308?

Answer is 0.16979%(209.1308/1231.6708)

IRR = 25 + 0.16979 = 25.17%

Requirement 30 Year 0 1 2 3 Sales (Revenue) 100000 100000 100000 Cost of Goods Sold (50% of sales) 50000 50000 50000 Depreciation 29997 40005 13329 6669 EBIT -29997 9995 36671 43331 Taxes -10498.95 3498.25 12834.85 15165.85 Unlevered Net Income -19498.05 6496.75 23836.15 28165.15 Depreciation 29997 40005 13329 6669 Working Capital -5000 5000 Purchase of Machine -90000 Salvage Value 6500 Net Free Cash Flow -84501.05 46501.75 37165.15 46334.15 Requirement 31: Year 0 1 2 3 Free Cash Flow -84501.05 46501.75 37165.15 46334.15 PVF (12%) 1 0.89285714 0.797193878 0.7117802 PV of FCF -84501.05 41519.4196 29627.83004 32979.733 19625.93

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