1. Hassle-Free Web is bidding to provide webpage hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10 300 per year for hosting its webpage and handling transactions on it, etc. Hassle-Free figures that it will need to purchase equipment worth $15 000 up front and then spend $2 000 per year on monitoring, updates, and bandwidth to provide the service for 3 years.

If Hassle-Free's cost of capital is 9.7%, can it bid less than $10 300 per year to provide the service and still increase its value by doing so?

2. Planet Enterprises is purchasing a $9.7 million machine. It will cost $49 000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. If Planet uses straight-line depreciation, what are the depreciation expenses associated with this machine?

3. You have forecast earnings of $1 065 000. This includes the effect of $186 000 in depreciation. You also forecast a decrease in working capital of $92 000 that year. What is your forecast of free cash flows for that year?