EBITDA: 5,318M Capital Budgeting Analysis (30 points) : You have been asked to evaluate a potential acquisition of a smaller privately owned…

EBITDA: 5,318M

Capital Budgeting Analysis (30 points)

  • Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years.
  • Current return on equity is 15%
  • Current WACC is 10%
  • Tax rate is 30% (constant)
  • 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values.
  • Residual value for this operation is to be 2x current EBITDA in year ten.
  • Economic analysis: is this a fundamentally sound investment?
  • Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?
  • Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion.

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