Note 1. For questions requiring calculation, answers without appropriate reasonings
or supporting calculation or will get ZERO.
Note 2. Keep only TWO digits in all calculation steps.
Question 3
Company NU is considering about the following information on a project:
(1) It has a 5-year lifetime
(2) The initial investment in the project will be $50 million, and the investment will be
depreciated straight line, down to a salvage value of $25 million at the end of the fifth
year.
(3) The revenues are expected to be $40 million in the first year and to grow 10% a year
after that for the remaining 4 years.
(4) The cost of goods sold, excluding depreciation, is expected to be 80% of revenues.
(5) The tax rate is 40%.
REQUIRED
Q2. a) Estimate the pre-tax return on capital (based upon average book capital over the
year) in percentages, by year and on average, for the project. [35
Marks]
Q2. b) Estimate the after-tax return on capital (based upon average book capital over the
year), by year and on average, for the project. [30 Marks]
Q2. c) What is economic value added (EVA)? Suppose that the firm’s cost of capital is 3.5%.
Should the firm take this project from based on its EVA?
[20 Marks]
Q2. d) We discussed management objectives during the course. Except from comparing
return of the project with the firm’s cost of capital, are there any other factors that should be
considered when assessing whether to take the project? Please illustrate with examples.
[15 Marks]