The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse

Question:

The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next five years. The firm’s CFO anticipates additional earnings before interest, taxes, depreciation, and amortization (EBITDA) 18 from cost savings equal to $ 200,000 for the first year of operation of the center; over the next four years, the firm estimates that this amount will grow at a rate of 5% per year. The system will require an initial investment of $ 800,000 that will be depreciated over a five-year period using straight-line depreciation of $ 160,000 per year and a zero estimated .
a. Calculate the project’s annual (FCF) for each of the next five years, where the firm’s tax rate is 35%.
b. If the for the project is 12%, what is the projected NPV for the investment?
c. What is the minimum year 1 dollar savings (i. e., EBITDA) required to produce a breakeven NPV = 0?
Salvage Value
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Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...