A purely equity financed firm is considering project ABC. The project generates the following stream of net
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Question:
A purely equity financed firm is considering project ABC.
The project generates the following stream of net income ie
earnings after depreciation and tax:
Year Year $ $ in the bad state or $ in the good state with equal
probability
The required investment at year is $ which is depreciated
using the straightline method. At the end of year the investment
can be sold for $
The project only requires $ net working capital in year which is
recovered at the end of the project.
Tax rate is Assume that taxes are paid in the same year.
Discount rate is
a What is the free cash flow of project ABC in each year?
b What is the NPV of project ABC? Should we implement this project?
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