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Most large U.S. corporations keep two separate sets of books, one for stockholders (financial accounting) and one for the Internal Revenue Service. True False Free cash flow (FCF) and net income differ in the several ways including which of the following? Net Income may include an interest expense; free cash flow is calculated assuming no debt. The net income calculation deducts various noncash expenses including depreciation; the FCF calculation only considers cash flows. Capital expenditures do not appear immediately and in total in the net income calculation; however, they do in the free cash flow calculation. Net income recognizes revenue at the time of sale; FCF recognizes the cash flow when payment is received. A piece of capital equipment costing $400,000 today is depreciated to $0 over five years according to straight-line depreciation. What is the book value of the equipment at the end of three years? $120,000 $80,000 $160,000 $240,000 If depreciation is $100,000 this year and the marginal tax rate is 35%, then the tax reduction due to the depreciation expense is: $35,000 $100,000 $65,000 $0 Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS 5-year class depreciation schedule: Year Depreciation Percentage 2096 3296 19.296 11.5% 11.596 5.896 Calculate depreciation for year 2. $120,000 $192,000 $96,000 $115,200 A project requires an initial capex of $200,000 (at t=0) and is expected to produce revenues of $300,000 per year and costs of $180,000 per year for two years (that is, at t = 1 and t = 2). The corporate tax rate is 30%. The assets will be depreciated using the MACRS 3-year schedule: Year Depreciation Percentage 3396 45% 1596 796 WACC is 12%. Assume that the capital asset will sell for book value at the end of two years. There is no change in net working capital. Calculate the NPV of the project. (HINT: in the FCF calculation, EBIT = revenue - costs - depreciation.) $22,463 $19,315 $16,244 $5,721