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:

Journal

A detailed record where all financial transactions of a business are initially recorded before being transferred to the accounts in the general ledger.

Transaction Recording Process

The methodical process of recording financial transactions in the books of accounts to ensure accurate financial reporting.

Journal

A chronological record of all transactions made by a company, used as the primary source of information for the financial statements.

Ledger

A comprehensive collection of a company's accounts where transactions are recorded, typically categorized into assets, liabilities, equity, revenues, and expenses.