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

question 54

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. Calculate the project NPV if 100% equity financing is used.

• A)$7.64
• B)$38.40
• C)$24.00
• D)$187.64

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Definitions:

Equity Method

An accounting technique used to record investments in other companies, recognizing income and changes in investment value in proportion to the ownership percentage.

Appraised Value

An estimation of the value of property, typically real estate, as determined by a professional appraiser based on market conditions and property characteristics.

Equity Income

Income that comes from stock dividends or the sale of shares, reflecting earnings from investment in equity securities.