Project #40602 - Aviation finance

Depreciation and Cash Flows

Introduction

The intent of this assignment is to demonstrate the effects of tax depreciation procedures on cash flows. This information is important because you may have be in a position to buy equipment for a company and will need to know the impact of tax depreciation on the cash flows of the organization.

Instructions

Using the scenario below create your own Word doc or Excel spreadsheet and complete the tables.
A firm expects to have earnings before interest and taxes (EBIT) of $165,000 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 $150,000, requires $10,000 in installation cost, and has a recovery period of 6 years. It will be the firm’s only asset, and the asset’s depreciation is already reflected in its EBIT estimates.
  1. Calculate the annual depreciation for the asset purchase using the MACRS depreciation schedule.
 

Cost

Percentages

Depreciation

Year

(1)

(2)

(1) x (2)

1

     

2

     

3

     

4

     

5

     

6

     
       
       

Cost = asset cost + installation cost

 
  1. Calculate the firm’s operating cash flows for each of the 6 years using the equation:  OCF = [EBIT x (1 – T)] + Depreciation
   

NOPAT

Depreciation

Operating Cash Flows

 

EBIT

[(1) x (1 - .40)]

 

[(2) + (3)]

Year

(1)

(2)

(3)

(4)

1

       

2

       

3

       

4

       

5

       

6

       

Grading

This assignment is worth 30 points, 15 points each for the Depreciation Schedule and Operating Cash Flows.

Subject Business
Due By (Pacific Time) 09/21/2014 06:00 pm
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