Question

Smithsonian Co. just acquired for a new project with a 5 year life a new plant for 16,000,000 Euros that it will depreciate straight line in 4 years. The company keeps a constant debt amount (9,648,480 Euro). The project will have a 2,300,000 Euro expected EBIT for each year of the life of the project, a cost of levered equity equal to 15%, a debt-to-equity ratio of 0.75 and a wacc equal to 9.50%. The corporate tax rate is 34%. Assuming that the depreciation tax shield is as risky as the company’s debt, the NPV of the project is closest to

A. 3,502.340 Euro
B. 4, 987,009 Euro
C. 6,513,120 Euro
D. 7,761,986 Euro
The correct answer is C

Answer 1

			rupees in lakh euro
Particulars	year	[email protected]%	Amount	Amount
cash outflow
purchases plant	0	1	160	160
cash inflow
inflow from project as revenue	1	0.913	1032364	942548.4
inflow from project as revenue	2	0.834	1032364	860991.7
inflow from project as revenue	3	0.761	1032364	785629.1
inflow from project as revenue	4	0.695	1032364	717493
inflow from project as revenue	5	0.635	367664.1	233466.7
				3540129
w.k	1-4 YEAR	5 YEAR
EBIT	2300000	2300000
less: depreciation	4000000	0
Loss:	1700000	2300000
so there is no tax libilities(34%)		782000
Add: depreciation	1700000	0
TOTAL EBIT	2300000	1518000
LESS: INTEREST ON DEBT @11.25%	1085454	1085454
EBIT	1214546	432546
LESS: COST OF EQUITY	182181.9	64881.9
NET EARNIG AFTER TAX	1032364	367664.1