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Shop Now UULIUKU GLC LLL ed to be $20 million next year after that for the re- cluding depreciation, is ex- ues. e. Projects with high financial leverage will have higher interest expenses and lower net income than projects with low financial leverage and thus end up with a lower return on equity. d. Increasing the depreciation on an asset will increase the estimated return on capital and equity on the project. The average return on equity on a project over its lifetime will increase if we switch from straight line to double declining balance depreciation. 5. Under what conditions will the return on equity on a project be equal to the IRR, estimated from cash flows to equity investors, on the same project? 6. You are provided with the projected income statements for a project: e. non capital, by year and rn on capital, by year and - capital of 12%, should it Problem 1 remain un- ciation method, which is od with the following de- Year 2 3 4 able Asset Revenues - Cost of goods sold - Depreciation = EBIT $10,000 $11,000 $12,000 $13,000 $4,000 $4,400 $4,800 $5,200 $4,000 $3,000 $2,000 $1,000 $2,000 $3,600 $5,200 $6,800 tment Salvage value on capital, by year and non capital, by year and apital of 12%, should it The tax rate is 40%. The project required an initial investment of $15,000 and an additional investment of $2,000 at the end of year 2. The working capital is anticipated to be 10% of rev- enues, and the working capital investment has to be made at the beginning of each period. a. Estimate the free cash flow to the firm for each of the four years. b. Estimate the payback period for investors in the firm. Estimate the NPV to investors in the firm, if the cost of capital is 12%. Would you accept the project? d. Estimate the IRR to investors in the firm. Would you accept the project? 7. Consider the project described in Problem 6. Assume that the firm plans to finance 40% of its net capital ex- penditure and working capital needs with debt. c. Fibed in Problem 1 (as- erts to a straight line). vestment for the project annual interest rate of he principal at the end y, by year and on aver