The firm XYZ invests $2.5 billion to build a new plant. They expect first year EBIT to
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Question:
The firm XYZ invests $2.5 billion to build a new plant. They expect first year EBIT to be $1 billion and growing at 5% for the next 5 years. The tax rate is 30%. The firm has to keep working capital at 10% of EBIT. For simplicity, assume no amortization or capital expenditures. The firm plans to sell the plant at $1.5 billion at the end of year 5. XYZ's WACC is 10%.
What is the net present value of the project?
A) $2.746 billion
B) $2.500 billion
C) $1.069 billion
D) $1.230 billion
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