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Estimate the after-tax return on capital

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Reference no: EM131683038

Question: You have been given the following information on a project:

• It has a 5-year lifetime

• The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a salvage value of $10 million at the end of the fifth year.

• The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining 4 years.

• The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.

• The tax rate is 40%.

a. Estimate the pre-tax return on capital, by year and on average, for the project.

b. Estimate the after-tax return on capital, by year and on average, for the project.

c. If the firm faced a cost of capital of 12%, should it take this project.

Reference no: EM131683038

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