ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 36

depreciation using MACRS? Which schedule would you recommend to use? EBIT · What will be the costs and revenues for the first four years? What will be the incremental EBIT (Earnings before Interest and Taxes) each year? Interest and Taxes You now have to need to determine interest costs and taxes. Assume that the cost of setting up the plant will be 50% financed by debt with an interest rate of 7%. At this point you are getting closer to the cash flows the project will produce, and need to determine the tax rate. You research tax rates and determine that the appropriate tax rate is 40%. · What incremental taxes Zeta will pay if the Spenza plant is set up? Net Income · What will be the incremental Net Income for Zeta from the project each year? Incremental OCF Now you can calculate the net increase in cash flows from the project. · What will be the incremental OCF (Operating Cash Flow) each year? Free Cash Flow The next step will be calculating FCF taking into account OCF and other incremental cash flows, including opportunity costs! At this point we are still assuming that the project will last only for four years. · What will be the FCF (Free Cash Flow) each year? WACC and CAPM The next step will be estimating WACC. Using Yahoo Finance! or other financial sources available on the course website find auto- making industry’s beta, market risk premium and the risk free rate. · Estimate the WACC using the earlier assumption about the project’s financing and the CAPM equation for the cost of equity. Decision Criteria – NPV and IRR Now you are ready to calculate the first criterion that is used to assess projects. · What will be the Net Present Value of the project?