Can anyone explain why (S-C-D)= 50? I would think it would equal 0 because the cost reduction of 50 each year would be offset by the depreciation of 50 each year.
Problem
“Fontenot Company is investing €100 in a project that is being depreciated straight-line to zero over a two-year life with no salvage value. The project will generate earnings before interest and taxes of €50 each year for two years. Fontenot’s weighted average cost of capital and required rate of return for the project are both 12 percent, and its tax rate is 30 percent.”
The after-tax operating cash flows in euros for the Fontenot Company are:
Solution:
The problem gives EBIT not EBITDA.
CF = (S – C – D)(1 – T) + D = 50(1 – 0.3) + 50 = €85 each year