Topic: (Free Cash Flow (FCF) and Valuation)

Gulf United is an IT solutions firm based in Silicon Valley, USA. The company want to improve their IT solution business by improving their bigdata and supercomputers. In doing so, the company can be either upgrade the original version or replace with new version. Gulf United will acquire bigdata and supercomputers by using the most efficient way. Gulf United is in the 40% tax bracket and cost of capital of 10%.

The conditions of the upgrade the original version or replace with the new version for bigdata facilities and supercomputers are as follows:

Upgrade the original version:

-Initial cost of old big data = $ 150,000

-Annual depreciation of $ 15,000

-The old big data facilities were purchased 5 years ago

-The current book value of old bigdata = $ 75,000

-The salvage value of old bigdata (today) = $ 95,000

-The salvage value in 5 years = $ 20,000

Replace with the new version:

-Initial cost of new bigdata = $ 250,000

-Its anticipated to have 5 years life

-The salvage value in 5 years = $ 0

-Cost savings per year = $ 75,000 per year

-The company will use 3-years MACRS depreciation.

TABLE 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 33.33% 20.00% 14.29% 10.00% 5.00% 3.750% 44.45 32.00 24.49 18.00 9.50 7.219 14.81 19.20 17.49 14.40 8.55 6.677 7.41 1 1.52 12.49 1 1.52 7.70 6.177 1 1.52 8.93 9.22 6.93 5.713 5.76 8.92 7.37 6.23 5.285 8.93 6.55 5.90 4.888 D W N - O 0 0 - Q UA W N- 4.46 6.55 5.90 4.522 6.56 5.91 4.462 6.55 5.90 4.461 3.28 5.91 4.462 5.90 4.461 5.91 4.462 5.90 4.461 15 5.91 4.462 16 2.95 4.461 17 4.462 18 4.461 19 4.462 20 4.461 21 2.231