NHP invested $100 million in a new production line which will generate after-tax operating cash flow...

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NHP invested $100 million in a new production line which will generate after-tax operating cash flow of $40 million at the end of each of the next 5 years. There is no net working capital investment required. The new line will wear out and will have zero salvage value. NHP's cost of capital is 10% and its corporate tax rate is 30%. Note that after-tax operating cash flow is equal to net operating profit after-tax (NOPAT) plus depreciation. a. Find the NPV of the project. b. Find the PV of the project's EVAS under each of the depreciation schedules below: Straight-line full depreciation over 5 years; (i) (ii) Annual depreciation of 40%, 30%, 20%, 10% and 0% over 5 years; Annual depreciation of 25%. (iii) HINT: To compute the annual EVAS, use the definition EVA = NOPAT - (Capital Employed x Cost of Capital), where Capital Employed is the value of the asset at the start of each year. NOPAT = Net Operating Profit After Tax. c. What is the relationship between the NPV and the PV of EVAs of a project? NHP invested $100 million in a new production line which will generate after-tax operating cash flow of $40 million at the end of each of the next 5 years. There is no net working capital investment required. The new line will wear out and will have zero salvage value. NHP's cost of capital is 10% and its corporate tax rate is 30%. Note that after-tax operating cash flow is equal to net operating profit after-tax (NOPAT) plus depreciation. a. Find the NPV of the project. b. Find the PV of the project's EVAS under each of the depreciation schedules below: Straight-line full depreciation over 5 years; (i) (ii) Annual depreciation of 40%, 30%, 20%, 10% and 0% over 5 years; Annual depreciation of 25%. (iii) HINT: To compute the annual EVAS, use the definition EVA = NOPAT - (Capital Employed x Cost of Capital), where Capital Employed is the value of the asset at the start of each year. NOPAT = Net Operating Profit After Tax. c. What is the relationship between the NPV and the PV of EVAs of a project?

Answer rating: 100% (QA)

To solve this problem well calculate the NPV of the project and the present value PV of the projects Economic Value Added EVA under different depreciation schedules a NPV Calculation To find the NPV o... View the full answer