Hanadi Industries is considering expanding its production capacity by purchasing a new machine. The new machine requires
Question:
Hanadi Industries is considering expanding its production capacity by purchasing a new machine. The new machine requires an initial outlay of $500 million. Once the machine is operating, the extra capacity is expected to generate $75 million per year in additional earnings after tax [EBIT (1-T)], which will continue for the 5-year life of the machine. This new machine will be depreciated evenly over the five years, at which point it must be replaced. The opportunity cost of capital for this type of machines is 15%.
a) What is your estimate of the EVAs of this project?
b) What is your estimate of the NPV of this project?
c) Calculate the present value of the EVAs (i.e., MVA) and verify that they are equal to the NPV.
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart