Golden Bear Cafe can either rent or buy forklifts. Renting cost is $30,000 per year (including maintenance). Purchasing cost is $100,000 at year 0 and for all the following years, an additional $12,500 annual maintenance fee needs to be paid starting from year 1.

The discount rate is 7% annually and the tax rate is 25%. Assume a forklift has a 5-year lifespan and will be depreciated using the straight-line method over that period (from year 1 to year 5).

Questions:

1. What is the Free Cash Flow per year of renting the forklifts?

2. What is the Free Cash Flow at year 0 when buying the forklifts?

3. What is the Free Cash Flow per year from year 1 to year 5 when buying the forklifts?

Answer rating: 100% (QA)

To calculate the Free Cash Flow FCF for both renting and buying the forklifts we need to consider th... View the full answer