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"High Flyer, Inc., is considering an investment in a new distribution center.

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 "High Flyer, Inc., is considering an investment in a new distribution center. High Flyer's CFO anticipated additional earnings before interest and taxes of $100,000 for the first year of operation of the center, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $600,000 that will be depreciated over a five-year period toward a zero salvage value using straight-line depreciation. It is estimated that the distribution center will need operating net working capital equal to 25% of EBIT to support operation. At the end of the 5th year, High Flyer will sell the distribution center for an estimated amount of $10,000. High Flyer's WACC is 19% and it faces a 30% tax rate."

What is the value of this project?

Should the company undertake this project?

Under what condition will you change your recommendation?


Top Answer

(i) The value of this project is determine by way of Net Present Value Net Present Value = -$ 26 ,... View the full answer

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