I have forgotten how to solve this… If someone is kind enough to list the steps needed for calculating the EI… Firehouse Company is investing in a €300 million project that is being depreciated on a straight-line basis over a two-year life with no salvage value. The project will generate operating earnings of €130 million each year for the two years. The required rate of return for the project is 10 percent and Firehouses tax rate is 30 percent. What is Firehouses economic income for years 1 and 2? Year 1 Year 2 A) €0 €0 B) -€20 -€20 C) €42 €22 D) €61 €76
I get C 130(1-.3) + 150 = 241 Then you have to subtract off the change in MV. 241/1.1 + 241/1.1^2 = 418 241/1.1 = 219 Change = 199 Year 1 = 241 - 199 = 42 Year 2 = 241 - 219 = 22
Thanks Niblita! Knocked this LOS down… Killed it! EI = ATCF - ED ATCF = OI*(1- TR) + D BMV = PV(rem ATCF @ WACC) delta(MV) = ED = EMV - BMV ERoR = EI/BMV ~~ WACC C is the correct answer.