Question
1.A firm is considering the purchase of a machine which would represent an investment of $26...
1.A firm is considering the purchase of a machine which would represent an investment of $26 million, and would be depreciated in a straightline basis over 6 years. Sales are expected to be $14 million per year, and operating costs 49% of sales. The company is currently paying $2 million in interest per year, has a tax rate of 40%, and a WACC of 10%. What is the company’s free cash flow for year 1 of this project?
2.You now have $9101. At what annual interest rate would you have to invest this money so you can double it in 8 years? Assume annual compounding.
Homework Answers
Answer #1
1.
Value of initial Investment = $26,000,000
Life of asset = 6 year
Annual Depreciation = $26,000,000 / 6
= $4,333,333
Annual Depreciation on assets is $4,333,333.
Profit before tax = $14,000,000 - ($14,000,000 × 49%) - $4,333,333 - $2,000,000
= $806,667
Profit before tax is $806,667.
Tax rate = 40%
Net income = $806,667 × (1 - 40%)
= $484,000.20.
Net Income is $484,000.20.
Free cash flow = $484,000.20 + $4,333,333 + $2,000,000
= $6,817,333.20.
Free Cash flow is $6,817,333.20.
2.
Value of investment = $9,101
Double amount = 2 × $9,101
= $18,202.
Tenure = 8 year
Number of year it take is calculated in excel and screen shot provided below:
Annual rate of return is 9.05%.
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