Used in free cash flow forecast model

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Consider a firm in an industry in which technology improvements are constantly lowering its cost of physical capacity. On average, the cost to acquire a unit of physical capacity drops by about 15% per year and is expected to continue to do so for the foreseeable future. Fixed assets are depreciated on a straight-line basis over five years and, if not for the dropping cost of capacity, would represent a reasonable estimate of the amount of capital investment necessary to maintain capacity at the existing level.

Construct formulas that could be used in a free cash flow forecast model to determine the amount of depreciation and capital expenditures in a given year. Assume that sales have already been forecasted and are represented by SALES.

Reference no: EM13894338

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