Question

# F.E 5. A firm with \$3 million  EBIT, \$0.7 million depreciation, a tax rate of .4, a...

F.E

5. A firm with \$3 million  EBIT, \$0.7 million depreciation, a tax rate of .4, a capital expenditure of \$0.8 million, and an increase in NOWC of \$1.1 million will have a free cash flow of what amount for the year? Please answer in units of million dollars to the closest tenth of a million as in \$x.x million without entering the dollar sign or the million word.

6. How much is the present value of an annuity of \$3,000 dollars per year for 14 years, at an annual interest rate of 7.1 percent? Answer to the nearest cent (xxx.xx) and enter without the dollar sign.

The free cash flow is computed as shown below:

= EBIT (1 – tax rate) + Depreciation – Capex – Increase in Working capital

= \$ 3 million x (1 - 0.40) + \$ 0.7 million - \$ 0.8 million - \$ 1.1 million

= \$ 0.6 million

The present value is computed as shown below:

Present value = Annual payment x [ (1 – 1 / (1 + r)n) / r ]

= \$ 3,000 x [ (1 - 1 / (1 + 0.071)14 ) / 0.071 ]

= \$ 3,000 x 8.693262151

= \$ 26,079.79 Approximately

Feel free to ask in case of any query relating to this question

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