You are given the following information about a corporation. • The project will require an initial investment of $30,000 in 2019 that will be depreciated over a three-year period towards a zero-salvage value using straight-line depreciation. • The sales and costs in 2020 are $30,000 and $10,000, respectively. • The firm estimates that additional earnings before depreciation, interest and taxes (EBDIT) will grow at a rate of 5% per year over the next two years. • You estimate that this new project will need net working capital equals to $2,000 at the start of the project and after that it will be calculated on the basis of 10% of EBDIT each year. • The firm faces a 15% tax rate, Calculate the project’s annual free cash flow (FCF) for each year (2019, 2020, 2021 and 2022).
You are given the following information about a corporation. • The project will require an initial investment of $30,000 in 2019 that will be depreciated over a three-year period towards a zero-salvage value using straight-line depreciation. • The sales and costs in 2020 are $30,000 and $10,000, respectively. • The firm estimates that additional earnings before depreciation, interest and taxes (EBDIT) will grow at a rate of 5% per year over the next two years. • You estimate that this new project will need net working capital equals to $2,000 at the start of the project and after that it will be calculated on the basis of 10% of EBDIT each year. • The firm faces a 15% tax rate, Calculate the project’s annual free cash flow (FCF) for each year (2019, 2020, 2021 and 2022).
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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You are given the following information about a corporation.
• The project will require an initial investment of $30,000 in 2019 that will be depreciated over a three-year period towards a zero-salvage value using straight-line depreciation.
• The sales and costs in 2020 are $30,000 and $10,000, respectively.
• The firm estimates that additional earnings before depreciation, interest and taxes (EBDIT) will grow at a rate of 5% per year over the next two years.
• You estimate that this new project will need net working capital equals to $2,000 at the start of the project and after that it will be calculated on the basis of 10% of EBDIT each year.
• The firm faces a 15% tax rate,
Calculate the project’s annual free cash flow (FCF) for each year (2019, 2020, 2021 and 2022).
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