3-4 Breakeven Sensitivity Analysis The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next five years. The firms CFO anticipates additional earnings before interest, taxes, depreciation, and amortization (EBITDA)18 from cost savings equal to $200,000 for the first year of operation of the center; over the next four years, the firm estimates that this amount will grow at a rate of 5% per year. The system will require an initial investment of $800,000 that will be depreciated over a five-year period using straight-line depreciation of $160,000 per year and a zero estimated salvage value. 18 EBITDA is a widely used measure of firm earnings that we will encounter many times throughout the balance of the text. It is simply earnings before interest and taxes (EBIT), plus depreciation and amortization expense. Calculate the projects annual free cash flow (FCF) for each of the next five years, where the firms tax rate is 35%. If the cost of capital for the project is 12%, what is the projected NPV for the investment? What is the minimum year 1 dollar savings (i.e., EBITDA) required to produce a breakeven NPV = 0?

PROBLEM 3-1: Clayton Manufacturing Company = Given EBITDA (Year 1) Growth Rate in EBITDA Initial investment $ Depreciation (Straight line) over Estimated salvage value Tax rate Cost of capital 200,000 5% 800,000 Solution Legend Value given in problem Formula/Calculation/Analysis required Qualitative analysis or Short answer required Goal Seek or Solver cell - Crystal Ball Input Crystal Ball Output 5 years 35% 12% Solution Years 3 2 4 5 1 200,000 a. EBITDA Less: Depreciation Expense EBIT Less: Taxes NOPAT Plus: Depreciation Expense Less: CAPEX Less: Change in Working Capital Project FCF b. NPV C. Using "Goal Seek" to solve for the EBITDA in year 1 (C5) that yields a NPV of 0 (C28). Breakeven Year 1 EBITDA