PROBLEM 7-2

Given
Tax rate 30.00%
Cost of Capital 15.00%
Year
2015 2016 2017 2018
EBITDA $ 2,400,000 $ 2,400,000 $ 4,250,000
Less: Depreciation (2,000,000) (2,000,000) (2,000,000)
EBIT $ 400,000 $ 400,000 $ 2,250,000
Less: Tax (120,000) (120,000) (675,000)
Net Income $ 280,000 $ 280,000 $ 1,575,000

Investment $ (6,000,000)

Free Cash Flow Analysis

Year
2015 2016 2017 2018
PFCF $ (6,000,000.00) $ 2,280,000.00 $ 2,280,000.00 $ 3,575,000.00
NPV $ 57,236.79
IRR 15.53%

EVA Analysis
NOPAT $ 280,000.00 $ 280,000.00 $ 1,575,000.00
Invested capital $ 6,000,000.00 $ 4,000,000.00 $ 2,000,000.00 $ -
ROIC 4.67% 7.00% 78.75%
Economic Profit $ (620,000.00) $ (320,000.00) $ 1,275,000.00
MVA $ 57,236.79

Bierman (1988) revised EVA analysis

Present Value $ 6,000,000.00 $ 4,651,888.26 $ 3,094,394.94 $ -
Economic depreciation $(1,348,111.74) $ (1,557,493.32) $ (3,094,394.94)
Revised NOPAT equals $ 931,888.26 $ 722,506.68 $ 480,605.06
Project FCF + Ec. Deprn
Revised Invested Capital $ 6,000,000.00 $ 4,651,888.26 $ 3,094,394.94 $ -
Revised ROIC 15.53% 15.53% 15.53%
Revised capital charge $ 900,000.00 $ 697,783.24 $ 464,159.24
Revised Economic Profit $ 31,888.26 $ 24,723.44 $ 16,445.81
MVA $ 57,236.79

The use of economic depreciation implies that economic profit in all years is positive (indicating a
positive NPV project). On the other hand, the "regular" EVA analysis shows that economic profit is
negative in the first two years and positive only in the third year. The project has backloaded earnings
as can be seen from the net income over the three years.
Assume machine life of three years

Backloaded earnings

Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output

We can see that ROIC has an

intermediate value under the revised
economic profit approach whereas it
tends to seem too low or too high under
the standard economic profit approach.
 PROBLEM 7-3

Given
Tax rate 30.00%
Cost of Capital 15.00%
Year
2015 2016 2017 2018
EBITDA $ 4,250,000.00 $ 2,900,000.00 $ 1,000,000.00
Less: Depreciation (2,000,000.00) (2,000,000.00) (2,000,000.00)
EBIT 2,250,000.00 900,000.00 (1,000,000.00)
Less: Tax (675,000.00) (270,000.00) 300,000.00
Net Income 1,575,000.00 630,000.00 (700,000.00)

Investment (6,000,000.00)

Free Cash Flow Analysis

Project FCF (6,000,000.00) 3,575,000.00 2,630,000.00 1,300,000.00
NPV (47,875.40)
IRR 14.43%

EVA Analysis
NOPAT $ 1,575,000.00 $ 630,000.00 $ (700,000.00)
Invested capital $ 6,000,000.00 $ 4,000,000.00 $ 2,000,000.00 $ -
ROIC 26.25% 15.75% -35.00%
Economic Profit $ 450,000.00 $ 15,000.00 $ -
MVA $ 402,646.50

Bierman (1988) revised EVA analysis

Present Values $ 6,000,000.00 $ 3,291,017.02 $ 1,136,029.81 $ -
Economic depreciation $(2,708,982.98) $ (2,154,987.21) $ (1,136,029.81)
Revised NOPAT equals
Project FCF + Ec. Deprn $ 866,017.02 $ 475,012.79 $ 163,970.19
Revised Invested Capital $ 6,000,000.00 $ 3,291,017.02 $ 1,136,029.81 $ -
Revised ROIC 14.43% 14.43% 14.43%
Revised capital charge $ 900,000.00 $ 493,652.55 $ 170,404.47
Revised Economic Profit $ (33,982.98) $ (18,639.76) $ (6,434.28)
MVA $ (47,875.40)

The use of economic depreciation implies that economic profit in all years is negative (indicating a
negative NPV project). On the other hand, the "regular" EVA analysis shows that economic profit is
positive in the first two years and negative only in the third year. The project has frontloaded earnings
as can be seen from the net income over the three years.
Assume machine life of three years

Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
 PROBLEM 7-4

a. Since the opportunity costs of investing excess cash (retained earnings) is exactly equal to the cost of capital (equity),
accretion of EPS.
b. The projects NPV is given below.
c. Given below.
d. NPV is positive. The project should be accepted.

Firm (Beck Electronics) Characteristics & Assumptions

Invested Capital $ 30,000,000
Borrowing Rate 5.00% Firm and project cost of debt
Debt Financing $ 2,000,000
Required Equity Return 10.00% Firm and project cost of equity
Tax Rate 20.00% Same for firm and project
T-Bill Yield 4.00%
Shares outstanding 2,000,000
EBIT $ 4,000,000 per year (level perpetuity)
Cash Balance (pre-project) $ 6,000,000 Sufficient to fund the equity
Debt as a percent of Enterprise Value 33.33% component of the investment
Equity as a percent of Enterprise Value 66.67%
Cost of Capital (WACC) 8.00% Same for firm and project
CAPEX = Depreciation Expense $ 2,400,000

Table 7-1
Panel a. Project Characteristics and Assumptions
Investment Outlay $ 6,000,000 One time expenditure today
Debt financing $ - Perpetual debt (never matures)
Rate or return on investments 12.5% Note: This is the return earned on the $6m used

Equity (from retained earnings) $ 6,000,000.00 Raised using excess cash

Additional EBIT per year $ 500,000.00 Per year (level perpetuity)
Panel b. Pro Forma Income Statements Pre-Project Firm Project
EBIT $ 4,000,000 $ 500,000
Less: Interest Expense $ (500,000)
Plus: Interest Income (equity financing) $ 750,000
EBT $ 4,250,000 $ 500,000
Less: Taxes $ (850,000) $ (100,000)
Net Income $ 3,400,000 $ 400,000
Earnings per share $ 1.70 $ 0.20
Panel c. Cash Flow Analysis Pre-Project Firm Project
EBIT $ 4,000,000 $ 500,000
less: Taxes $ (800,000) $ (100,000)
NOPAT $3,200,000 $400,000
plus: Depreciation $2,400,000
less: Capex ($2,400,000)
FCF $3,200,000 $400,000
Panel d. Firm and Project Valuation Analysis Project
Value of Pre-Project Firm
Less: Investment Outlay $ (6,000,000)
Plus: Value of Project Cash flows $ 5,000,000
Value of Firm plus Project
Net Present Value

Table 7-2
Panel a. EVA® Analysis Pre-Project Firm Project
EBIT $4,000,000 $500,000
Less: Taxes ($800,000) ($100,000)
NOPAT $3,200,000 $400,000
Less: Capital Charge ($2,400,000) ($480,000)
Economic Profit $800,000 ($80,000)
o the cost of capital (equity), there will be neither dilution nor

Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output

rn earned on the $6m used to tund the new investment

Firm + Project
$ 4,500,000
$ (500,000)
$ 750,000
$ 4,750,000
$ (950,000)
$ 3,800,000
$ 2
Firm + Project
$ 4,500,000
$ (900,000)
$ 3,600,000
$ 2,400,000
$ (2,400,000)
$ 3,600,000
Firm + Project
$ 40,000,000
$ 39,000,000
$ (1,000,000)

Firm + Project
$ 4,500,000
$ (900,000)
$ 3,600,000
$ (2,880,000)
$ 720,000
 Solution Legend
n in problem
alculation/Analysis required
analysis or Short answer required
or Solver cell
l Input
l Output
 PROBLEM 7-5

Given
Tax Rate 30.00%
Capital Expenditures in 2015 $100,000 and none thereafter
Weighted Average Cost of Capital 11.24%

Project Pro Forma Income Statements

Year
2016 2017
Revenues $ 100,000.00 $ 105,000.00
Less: Cost of Goods Sold (40,000.00) (42,000.00)
Gross Profit $ 60,000.00 $ 63,000.00
Less: Operating Expenses (20,000.00) (21,000.00)
Less: Depreciation Expense (20,000.00) (20,000.00)
Net Operating Income $ 20,000.00 $ 22,000.00
Less: Interest Expense (3,200.00) (3,200.00)
Earnings before Taxes $ 16,800.00 $ 18,800.00
Less: Taxes (5,040.00) (5,640.00)
Net Income $ 11,760.00 $ 13,160.00

Project Free Cash Flows

Year
2015 2016 2017
Net Operating Income $ 20,000.00 $ 22,000.00
Less: Taxes (6,000.00) (6,600.00)
NOPAT $ 14,000.00 $ 15,400.00
Plus: Depreciation 20,000.00 20,000.00
Less: CAPEX (100,000.00) - -
Less: Change in NWC (5,000.00) (250.00) (262.50)
Project Free Cash Flow $ (105,000.00) $ 33,750.00 $ 35,137.50

Solution
Year
2016 2017
Invested Capital (Beginning of year) $ 105,000.00 $ 85,250.00

a. What is the project's expected NPV? IRR?

NPV $ 32,288.55
IRR 22.29%

b. Calculate the annual EVAs for 2010 through 2014.

Year
2016 2017
Invested Capital $ 105,000.00 $ 85,250.00
NOPAT $ 14,000.00 $ 15,400.00
Less: Capital Charge $ (11,802.00) $ (9,582.10)
EVA $ 2,198.00 $ 5,817.90

PV of EVAs $ 32,288.56

c. How would your assessment of the project's worth be affected if the economic profit in 2016 and 2017 were both negat

Nếu v thì cái project này thuộc TH back-loaded => mình ko đc dùng EVA mà phải dùng revised EVA (có cái economic de
-5

Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer requ
= Goal Seek or Solver cell
e Statements = Crystal Ball Input
Year = Crystal Ball Output
2018 2019 2020
$ 110,250.00 $ 115,762.50 $ 121,550.63
(44,100.00) (46,305.00) (48,620.25)
$ 66,150.00 $ 69,457.50 $ 72,930.38
(22,050.00) (23,152.50) (24,310.13)
(20,000.00) (20,000.00) (20,000.00)
$ 24,100.00 $ 26,305.00 $ 28,620.25
(3,200.00) (3,200.00) (3,200.00)
$ 20,900.00 $ 23,105.00 $ 25,420.25
(6,270.00) (6,931.50) (7,626.08)
$ 14,630.00 $ 16,173.50 $ 17,794.17

Flows
Year
2018 2019 2020
$ 24,100.00 $ 26,305.00 $ 28,620.25
(7,230.00) (7,891.50) (8,586.08)
$ 16,870.00 $ 18,413.50 $ 20,034.18
20,000.00 20,000.00 20,000.00
- - -
(275.63) (289.41) 6,077.53
$ 36,594.37 $ 38,124.09 $ 46,111.71

Year
2018 2019 2020
$ 65,512.50 $ 45,788.13 $ 26,077.54

Year
2018 2019 2020
 $ 65,512.50 $ 45,788.13 $ 26,077.54
$ 16,870.00 $ 18,413.50 $ 20,034.18
$ (7,363.61) $ (5,146.59) $ (2,931.12)
$ 9,506.40 $ 13,266.91 $ 17,103.06

profit in 2016 and 2017 were both negative?

dùng revised EVA (có cái economic depreciation

 Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output