(30 marks) (10 marks) The law firm Cobra is considering investing in a small business computer...

 

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(30 marks) (10 marks) The law firm Cobra is considering investing in a small business computer system. The initial investment will be $50,000. The computer is depreciated over 5 years using straight line depreciation to an expected salvage value of $5,000 at the end of the 5th year, and the firm's tax rate is 34%. The computer system is expected to provide additional revenue of $32,000 per year for the next five years, and the operating expenses are expected to be $7,000 per year. Working capital requirements are expected to be 10% of revenues (made at the beginning of each period). The cost of capital (WACC) is 12%. a) Estimate the operating free cash flows to the firm (FCFF) on the project for the next 5 years. (use tabular format, starting with Revenue and label each item). (8 marks) Year 0 Revenue Years 1-4 b) Calculate the NPV on this project. Should the firm invest in the project? Year 5 (2 mark) (30 marks) (10 marks) The law firm Cobra is considering investing in a small business computer system. The initial investment will be $50,000. The computer is depreciated over 5 years using straight line depreciation to an expected salvage value of $5,000 at the end of the 5th year, and the firm's tax rate is 34%. The computer system is expected to provide additional revenue of $32,000 per year for the next five years, and the operating expenses are expected to be $7,000 per year. Working capital requirements are expected to be 10% of revenues (made at the beginning of each period). The cost of capital (WACC) is 12%. a) Estimate the operating free cash flows to the firm (FCFF) on the project for the next 5 years. (use tabular format, starting with Revenue and label each item). (8 marks) Year 0 Revenue Years 1-4 b) Calculate the NPV on this project. Should the firm invest in the project? Year 5 (2 mark)

Answer rating: 100% (QA)

aTo calculate the operating free cash flows FCFF for each year we need to calculate the following co... View the full answer