Question

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.

Answer 1

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