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

question 55

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 project IRR? (Ignore any tax laws allowing the carry
Forward or carry back of net operating losses, and round your answer to the nearest tenth of a
Percent.)

• A)16.0%
• B)33.1%
• C)25.8%
• D)7.1%