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You’re considering investing in a project with the following characteristics:
a. The investment of $400 can be depreciated to zero book value over 10 years.
b. EBITDA (= Sales – Costs) in year 1 is equal to $100, and from there on is expected to grow at 5% per year, every year, forever.
c. NWC requirements are $100 in year 0, and expected to remain constant forever. d. The discount rate for all cash flows is constant and equal to 20% per year.
a) Compute the NPV of the project if the tax rate is 0% per year. Is the IRR in this case higher or lower than 20%?
b) Compute the NPV of the project if the tax rate is 40% per year. Is the IRR in this case higher or lower than 20%?
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