A 3-Year Project Will Cost $180 at the End of Year

question 35

Multiple Choice

A 3-year project will cost $180 at the end of year 1 and is expected to produce operating profit before depreciation and amortization (EBITDA) of $80 in year 1, $100 in year 2, and $60 in year 3. Depreciation, both real and financial, will be calculated using straight-line depreciation over 3 years. The cost of capital is 10%, and the firm's marginal tax rate is 25%.
-Refer to the information above. Assume the firm will issue $100 of debt in year 1 with an expected interest rate of 8%. Interest must be paid each of the 3 years, and the principal is
Repaid at the end of year 3. What is the present value of the tax savings?

• A)$19.89
• B)$4.97
• C)$3.47
• D)$24.00

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Definitions:

Dramaturgy

An approach in sociology that views social life as a series of dramatic performances, with individuals playing various roles.

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