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)?

Answer rating: 100% (QA)

SOLUTION 1 Economic ValueAdded EVA is a financial performance metric that measures the value a company generates in excess of its cost of capital To c... View the full answer