Answer Happy

A company is considering launching a new product. Additional
invest- ments in the production line are estimated to be Euro10
mln. These investments are to be linearly depreciated during the
next 10 years. The company expects to close the project at the end
of the 6th year and sell the equipment and the plant for Euro 4.5
mln. The initial investment in the working capital is Euro 3 mln,
and it is expected to stay at 20% of sales each year. The sales are
expected to be Euro 20 mln at year 1, with the sales growth rate
decreasing linearly from 5% in the second year to 1% in the 6th.
Production costs are 75% of sales. The new product is likely to
compete with the existing main product of the company. As a result,
the new product is expected to reduce company’s EBIT from the
existing one by Euro 3 mln at year 1. In the absence of the
project, these profits would have grown by 2% per year. Company’s
profits are taxed at 35%. Calculate EBITt, NOPATt and the NPV of
the project assuming that the cost of capital is 8.5%.