Question

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
Year 0 1 2 3
Sales (Revenues) 100,000 100,000 100,000
- Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000
- Depreciation 30,000 30,000 30,000
= EBIT 20,000 20,000 20,000
- Taxes (35%) 7000 7000 7000
= unlevered net income 13,000 13,000 13,000
+ Depreciation 30,000 30,000 30,000
- capital expenditures -90,000
1. The free cash flow for the first year of Epiphany's project is closest to:________
A. $43,000
B. $25,000
C. $13,000
D. $45,000
2. The NPV for Epiphany's Project is closest to:_______
A. $4,800
B. $39,000
C. $13,300
D. $20,400

Answer 1

Answer:

FCF years 1 is $43,000

NPV is $13,300

Explanation:

The free cash flow for the first  year=net income+depreciation-Capital exp

net income is $13,000

depreciation is $30,000

capital exp for the first year is nil

the free cash flow=$13,000+$30,000+$0=$43,000

FCF year zero=-$90,000

the FCF for year1 applies to years 2 and 3 as well

NPV=-$90,000+$43,000/(1+12%)^1+$43,000/(1+12%)^2+$43,000/(1+12%)^3=

$13,278.74

The closest option is $13,300