QUESTION 8

The management of EMIRATES STEEL Company would like to buy a new equipment to expand its

operations. The equipment will cost EMIRATES STEEL Company AED 800,000 and will have a

salvage value of AED 100,000. Suppose the useful life of the equipment is 5 years and will be

depreciated over the 5 years.The Earnings before Depreciation and Taxes (EBDT) for Year 1 will be

AED 200,000 and will increase by 10% every year till Year 5. Assume a corporate tax rate of 50% for

this operation. The following table shows the free cash flow profile.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Initial Investment

EBDT

Depreciation

EBIT

Taxes @50%

Earnings After Tax (EAT)

Depreciation

Cash Flows

Using the given information and the table, you are required to answer the following questions:

a) Compute the free cash flows for this operation. [15 Marks].

b) Suppose EMIRATES STEEL