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%
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 projections:
Year | 0 | 1 | 2 | 3 |
Sales (Revenues) |
| 100,000 | 100,000 | 100,000 |
- Cost of Goods Sold (50% of Sales) |
| 50,000 | 50,000 | 50,000 |
- Depreciation |
| 30,000 | 30,000 | 30,000 |
= EBIT |
| 20,000 | 20,000 | 20,000 |
- Taxes (35%) |
| 7000 | 7000 | 7000 |
= unlevered net income |
| 13,000 | 13,000 | 13,000 |
+ Depreciation |
| 30,000 | 30,000 | 30,000 |
+ changes to working capital |
| -5000 | -5000 | 10,000 |
- capital expenditures | -90,000 |
|
|
|
A) What is the free cash flow for the first year of the project?
B) What is the rate of return that will make the NPV of the project equal to zero?
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