I dont understand this assignment.

The intent of this assignment is to demonstrate the effects of tax depreciation procedures on cash flows. This information is important because you may have be in a position to buy equipment for a company and will need to know the impact of tax depreciation on the cash flows of the organization.

Instructions

Using the scenario below create your own Word doc or Excel spreadsheet and complete the tables.

A firm expects to have earnings before interest and taxes (EBIT) of $165,000 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 $150,000, requires $10,000 in installation cost, and has a recovery period of 6 years. It will be the firms only asset, and the assets depreciation is already reflected in its EBIT estimates.

1. Calculate the annual depreciation for the asset purchase using the MACRS depreciation schedule.

Cost	Percentages	Depreciation
Year	(1)	(2)	(1) x (2)
1
2
3
4
5
6
Cost = asset cost + installation cost

1. Calculate the firms operating cash flows for each of the 6 years using the equation: OCF = [EBIT x (1 T)] + Depreciation

	NOPAT	Depreciation	Operating Cash Flows
EBIT	[(1) x (1 - .40)]	[(2) + (3)]
Year	(1)	(2)	(3)	(4)
1
2
3
4
5
6