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 firms only asset, and the assets 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 firms 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