a) The XYZ company is forecasting that it will generate EBIT of $30K, $40K and $50K in each of the next 3 years. Depreciation is expected to be $3K; $3.5K and $4K in each of the years of the EBIT forecast. Capital expenditures are estimated as $8K, $9K and $10K, per year over the same period. And increases in working capital are forecast as $2.5K; $3K; and 3.5K over the three years. The tax rate is 35%.

For the company XYZ as shown in (a), the cost of capital is 9 per cent. Free cash flows are expected to grow at 4 percent after year 3. Now apply the growing perpetuity formula to estimate the Terminal Value, as of year 3.