A company expects to generate EBIT of $ 160,000 in each of the next six years. The company pays annual interest of $ 15,000. The company is considering purchasing an asset worth $ 140,000, which requires $ 10,000 in installation costs and has a payback period of 5 years. It will be the only asset of the company, and depreciation of the asset is already reflected in the EBIT estimates.

a. Calculate the annual depreciation of an asset purchase using the MACRS depreciation ratios in Table 4.2

B. Calculate the company's operating cash flows for each of the six years, using. Assume a company is subject to a 40% tax rate on all profits it generates.

C. Suppose the firm's net fixed assets, current assets, accounts payable, and receivables had the following values at the beginning and end of the last year (Year 6). Calculate the company's free cash flow (FCF) for that year.

D. Compare and discuss the significance of each value in Parts B and C.

Year 6	Year 6
Account	Start	End
Net fixed assets	$ 7,500	$ 0
Current assets	90,000	110,000
Accounts payable	40,000	45,000
Accruals	8,000	7,000

Answer rating: 100% (QA)

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