Question
The Zenon Company plans to invest $1.8 million in a new four year expansion project. Additional EBITDA of $550,000 is expected at the end of
The Zenon Company plans to invest $1.8 million in a new four year expansion project. Additional EBITDA of $550,000 is expected at the end of year one. This amount is expected to grow by 5% per year for the three years after that. This initial investment will be depreciated over the four years of the project using straight line depreciation of $450,000 per year (leading to a zero estimated salvage value). Smiths corporate tax rate is 25%.
a. Calculate the project's annual free cash flow for each of the next four years.
b. If the cost of capital for the project is 9.5%, what is the expected NPV for the project?
c. What is the cost of capital required to produce a breakeven NPV = 0?
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