Powell Motors is considering an investment which will require $75 million of capital expenditures.The project is expected to generate $12 million in cash revenues each year for the next 5 years and cash expenses are expected to equal $5 million per year for the next 5 years.

The initial cost of $75 million will be depreciated straight-line to a zero salvage value over 5 years.In 5 years, the fixed assets are expected to be worthless.Powell Motors has negotiated a $20 million loan from a local bank to partially finance the project.The loan has a 7% interest rate.The local bank is requiring Powell Motors to pay $100,000 in fees.Powell Motors has a 25% tax rate.The firm is 25% debt financed, 75% equity financed, has a cost of debt of 7%, and a cost of equity of 12%.This gives the firm a WACC of: 12% (.75) + 7% (1-.25) (.25) = 10.31%.

Powell Motors hired some students to determine whether or not they should make this investment.The students put together the forecast below using the APV method.In this forecast, there are 5 errors.Your task is to identify these 5 errors.It is not necessary for you to fix the errors.I just want you to identify the 5 errors in the forecast.

NPV ( All Equity ) Year o Year 1 Year 2 Year 3 Year4 Year 5 Initial Cos (75, 000 , 000 ) EBITDA 7000 000 7000 000 7000 000 7000 000 7000 000 Tax ( 25 % ) 1 750 , 000 1 750 000 1 , 750 , 000 1 750 , 000 1 750 , 000 EBIAT 5 . 250 000 5, 250 000 5 , 250 000 5 , 250 000 5 , 250 000 + Depreciation 15 000 000 15 000 000 15 000 000 15 000 .000 15 000 .000 UCF (75 , 000 , 000 ) 20 250 , 000 20 250 , 000 20 250 , 000 20 250 , 000 20 , 250 , 000 Discount Rate 10.31 % NPV ( All Equity ) 1 159 353 . 34 NPV ( Financing Side Effects ) Year o Year 1 Year 2 Year 3 Year 4 Years Interest 1 400. 000 1 400.000 1400 090 1400 000 1400.000 Interest Tax Shield 1 050 000 1 050 , 000 1 050 , 000 1 050 , 000 1 , 050 , 000 Discount Rate 700% NPV ( Financing Side Effects ) 4 305 207 31 APV 5 , 464 , 560 . 65