I am working on a valuation question I found in one of the popular interview guides. The question asks me to evaluate the impact on thevaluation from the purchase of a factory with $100 cash on year 4 My answer was not similar to the one I found on the guide so I would appreciate if anybody could point out the flaw in my thinking:
- At year 4 I have Unlevered free cashflow UNCHANGED because Capex goes up by 100 but Change in NWC goes down by 100. so
- 100 - (-100) = 0.
- Assuming marginal tax rate 't', salv value = 0, useful life = 5 yr, then I have 5 tax shields on yrs 5 ... 9 each of which is 20*t. By discounting those 5 tax shields from depreciation using I get the increase in DCF valuation.