A firm expects to have earnings before interest and taxes (EBIT) of $160,000 in each of...

 

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A firm expects to have earnings before interest and taxes (EBIT) of $160,000 in each of the next 6 years. It pays annual interest of $15,000. The firm is considering the purchase of an asset that costs $140,000, requires $10,000 in installation cost, and has a recovery period of 5 years. It will be the firm's only asset, and the asset's depreciation is already reflected in its EBIT estimates. a. Calculate the annual depreciation for the asset purchase using the MACRS depreciation percentages in Table 4.2 on page 117. b. Calculate the firm's operating cash flows for each of the 6 years, using Equation 4.3. Assume that the firm is subject to a 40% tax rate on all the profit that it earns. c. Discuss the significance of each value calculated in parts B. A firm expects to have earnings before interest and taxes (EBIT) of $160,000 in each of the next 6 years. It pays annual interest of $15,000. The firm is considering the purchase of an asset that costs $140,000, requires $10,000 in installation cost, and has a recovery period of 5 years. It will be the firm's only asset, and the asset's depreciation is already reflected in its EBIT estimates. a. Calculate the annual depreciation for the asset purchase using the MACRS depreciation percentages in Table 4.2 on page 117. b. Calculate the firm's operating cash flows for each of the 6 years, using Equation 4.3. Assume that the firm is subject to a 40% tax rate on all the profit that it earns. c. Discuss the significance of each value calculated in parts B.

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ANSWER Solution Answer a Cost of Asset Purchase Price Installatio... View the full answer