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UMUC FIN 630 HW Session 3 Solution - PROBLEM 3-1 Clayton...

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Given EBITDA (Year 1) $200,000 Growth Rate in EBITDA 5% Initial investment $800,000 Depreciation (Straight line) over 5 years Estimated salvage value $- Tax rate 35% Cost of capital 12% Solution Years a. 0 1 2 3 4 5 EBITDA $200,000 $210,000 $220,500 $231,525 $243,101 Less: Depreciation Expense (160,000) (160,000) (160,000) (160,000) (160,000) EBIT $40,000 $50,000 $60,500 $71,525 $83,101 Less: Taxes (14,000) (17,500) (21,175) (25,034) (29,085) NOPAT $26,000 $32,500 $39,325 $46,491 $54,016 Plus: Depreciation Expense 160,000 160,000 160,000 160,000 160,000 Less: CAPEX (800,000) - - - - - Less: Change in Working Capital - - - - - - Project FCF $(800,000) $186,000 $192,500 $199,325 $206,491 $214,016 b. NPV $(85,926) c. Using "Goal Seek" to solve for the EBITDA in year 1 (C5) that yields a NPV of 0 (C28). Breakeven Year 1 EBITDA $233,551 PROBLEM 3-1: Clayton Manufacturing Company
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Given Investment cost (today) $(400,000) Project life 5 years Depreciation expense $80,000 Waste disposal cost savings per year $18,000 Labor cost savings per year $40,000 Sale of reclaimed waste $200,000 Required rate of return 20% Tax rate 35% Solution Part a. Year Cash flow estimation 0 1 2 3 4 5 Investment $(400,000) Waste disposal cost savings per year 18,000 18,000 18,000 18,000 18,000
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