Andy Ltd is considering investment in a project with below details. Analyse this investment using Economic Value-Added
Question:
Andy Ltd is considering investment in a project with below details. Analyse this investment using Economic Value-Added Method (EVA) only:
· It is a three-year project with initial investment of $9 Million, depreciating over three years using straight line method with zero salvage (residual) value at the end of year three.
· Estimated EBITDA for years 1-3 are $5 Million, $5.5 Million, and $6 Million, respectively with WACC 8% and tax rate 30%.
· Increases in net working capital investment each year is 15% of previous year end net invested capital.
2. Explain why some projects are earnings accretive while having negative net present value?
3. Discuss what P/E ratio is, how it is calculated, what it shows, and why firms with high P/E ratio tend to choose bad projects with good earnings (underestimating their true cost of equity capital)?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill