QUESTION 3 To start a new company, Awesome Foods (AF) funds are invested in buildings and equipment. The required cash outlay initially is $132 at the beginning of year 1 (time 0) and would generate net cash flows from cash collected from customers at the end of the subsequent three years (i.e., years 1-3). There is zero estimated salvage value of building and equipment at the end of year 3. The business generales decreasing annual revenues of $150, S100 and $50 over years 1, 2, and 3. All cash flows from operating activities are paid out at the end of the year they are earned the business has a cost of capital of 10% and calculates residual income with capital charges computed based on beginning-of- the-year net book value. Ignore taxes. REQUIRED: Question 3-A: Initially assume that buildings and equipment are depreciated using straight line depreciation over a three-year period. i) Describe annual cash flows for this investment. What is their Net Present Value (NPV)? ii) Construct income statements and balance sheets for each year. i) Without accounting adjustments, what would the residual income be for each year? iv) What is the present value of these residual incomes at time 0? 18 marks Question 3-B: Ignoring your calculations in question 3-A, assume instead that buildings and equipment are depreciated using 'straight line depreciation over a two-year period to a zero salvage value. (that is, AF assumes a two-year estimated useful life and therefore zero depreciation expense during year 3). i) Construct income statements and balance sheets for each year. ii) Considering accounting adjustments, what would the EVA (or residual income) be each year? What is the present value of these EVA (or residual incomes) at time 0? 14 marks! Question 3-C: Discuss the common use of a fixed EVA improvement goal in Sterms in practice. Also, how might the assumed estimated useful life affect reported EVA and EVA-based compensation? 17 marks! Question 3-D: For this question consider taxes. Recall that U.S. corporate tax rates decreased from 35% to 21% effective on 1 January 2018. Based on the Vader Pharmaceuticals case, describe the effect on reported EVA for 2018? Discuss whether the CEO should make an exception evaluating performance for 2018 and for 2019. 16 marks! Total 25 marks