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Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000
Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. The project will require an investment in net working capital equal to 2% of EBITDA in each of the years 1-4. Following year 4, the company expects free cash flows to grow at a constant 3% per year. The tax rate is 35% and the cost of levered equity is 13%. Sawtooth will borrow 40% of the project value at 6%. Debt will be paid down as shown in the table below: 0 1 2 3 4 Debt 30400 228000 152000 76000 0 outstanding A) What are the unlevered cash flows in years 0 through Year 4? B) What is the terminal value in year 4? C) What is the NPV of the project if it were all equity financed? D) What is the NPV of the interest tax shield? E) What is the APV of the project
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