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Depreciation and cash flow question

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Depreciation and Cash Flow Question

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.

Required:

Question 1: Calculate the annual depreciation for the asset purchase using the MACRS depreciation percentages in Table 4.2 on page 117.

Question 2: 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.

Question 3: Discuss the significance of each value calculated in parts B.

Reference no: EM132418818

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