3-1 BREAKEVEN SENSITlVITY ANALYSIS The Cayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cashsavings to the firm over the next five years.The firm’s CFO anticipates additional earn ingsbefore interest taxes depreciation and amortization (EBITDA)19 from cost savings equal to$200 000 for the first year of operation of the center; over the next four years the firmestimates that this amount will grow at a rate of 5% per year.The system will require an initialinvestment of $800 000 that will be depreciated over a five-year period using straight-linedepreciation of $160 000 per year and a zero estimated salvage value.L Calculate the project’s annual free cash flow (FCF) for each of the next five years where thefirm’s tax rate is 35%.b. If the cost of capital for the project is 12% what is the projected NPV for theinvestment?c. What is the minimum Year 1dollar savings (i.e. EBITDA) required to produce a breakeven NPV- 0?
