Assignment Task:
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:
Q1. Calculate the annual depreciation for the asset purchase using the MACRS depreciation percentages.
Q2. Calculate the firm's operating cash flows for each of the 6 years. Assume that the firm is subject to a 40% tax rate on all the profit that it earns.
Q3. Discuss the significance of each value calculated in parts 2.
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