A new asset will cost $800,000 and yield earnings before depreciation, interest and taxes (EBDIT) of $250,000. The asset will be depreciated to zero over 8 years on a straight-line basis. Assume that the tax rate is 35%. Using the tax shield approach, calculate the OCF of this asset.

Multiple Choice

• $197,500

• $200,000

• $250,000

• $165,000

• $97,500

2-

A new project will cost $100,000. It will increase sales by 80,000 units but will also increase annual fixed costs by $15,000. Selling price per unit is $6.20 and variable cost per unit is $5.20. The project will also require initial investment of $18,000 in net working capital. The project will last for three years, and depreciation will be straight-line to zero. Interest expense will be $5,000. Given that the required rate of return on this project is 18%, and the marginal corporate tax rate is 40%, what is the net present value of this project? Ignore the half-year rule.

Multiple Choice

• -$65,733.46

• -$4,213.05

• -$4,129.06

• $5,176.83

• $6,742.31