BIGBIRD ENTERPRISES

You have been retained as a consultant by a business that is considering production of a new product - oversized Owl Mascots

This production would require an initial capital outlay of $24 million. This capital expenditure can be depreciated (straight line) over a 3-year life of the project with no salvage value. Assume the firm faces a 25% marginal tax rate and a cost of capital of 8%.

If the project is funded, the resulting Net Operating Profit BEFORE Depreciation & Taxes (think EBITDA) are given below.

Net Operating Profit BEFORE Depreciation & Taxes (EBITDA)

Year 1 $15,000,000

Year 2 $16,000,000

Year 3 $17,000,000

(a) You have asked to calculate the Cash Flow for each year (Y0 to Y3). Further, using the 8% cost of capital, calculate the Present Value of the cash flows (also known as Net Present Value).