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UMUC FIN 630 HW Session 3 Solution

# 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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