In the spring of 2010, Jemison Electric was considering an investment in a new distribution center. Jemisons

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In the spring of 2010, Jemison Electric was considering an investment in a new distribution center. Jemisons CFO anticipates additional earnings before interest and taxes (EBIT) of $ 100,000 for the first year of operation of the center in 2011, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $ 400,000 that will be depreciated over a five- year period toward a zero salvage value using straight- line depreciation of $ 80,000 per year. Furthermore, Jemison expects to invest an amount equal to the firms annual depreciation expense to maintain the physical plant. These additional capital expenditures will also be depreciated over a period of five years toward a zero salvage value. Jemisons CFO estimates that the distribution center will need additional net working capital equal to 20% of new EBIT (i. e., the change in EBIT from year to year). Assuming the firm faces a 30% tax rate, calculate the projects annual project free cash flow (FCF) for each of the next five years.


Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...
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