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?