You’re considering investing in a project with the following characteristics:

1. The investment of $400 can be depreciated to zero book value over 10 years.

2. EBITDA in year 1 is equal to $100, and from there on is expected to grow at 5% per year, every year, forever.

3. NWC requirements are $100 in year 0, and expected to remain constant forever.

4. The discount rate for all cash flows is constant and equal to 20% per year.

QUESTIONS:

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%?

A little explanation with your answer would be greatly appreciated!!