You are a new analyst at a large investment bank. You are assigned to value an entity for potential investment using the discounted cash flow analysis. What is the value of the business assuming 5-year projections? The managing partner provides the following assumptions:

• EBITDA is $100 at year 0 and grows 5% each year
• The company has$150MM of debt on its balance sheet (7% interest rate)
• The Company has $100MM of equity on its balance sheet
• Assume ongoing CapEx to be 5% of EBITDA
• Assume the CapEx has a useful life of 10 years with no residual value.
• Depreciation can be accelerated (for deferred tax purposes) using the following simplified MACRS schedule (see note on MACRS below)

Yr. 1	Yr. 2	Yr. 3	Yr. 4	Yr. 5
25%	20%	15%	12%	10%

• The company has an effective tax rate of 35%
• Assume 30 days working capital for accounts receivable, 15 for inventory, 25 for accounts payable, and 10 for accrued expenses.
  • For simplification, assume all working capital items are projected off of EBITDA
• The risk-free rate of return is 2% and the market has returned 11% over the past 10 years.
• Use a 7.0x EBITDA for the EBITDA terminal value multiple.
• Assume a 1% perpetuity growth rate.
• The companys beta is 1.

MACRS or Modified Cost Recovery System is a tax method of depreciation. As noted by the table above, it is higher in the early years than the straight line accounting method and thus provides taxpayers cash benefits through tax deferrals.

In your DCF Valuation calculate EBIT, D&A and CapEx as normal

Then calculate the deferred tax benefit produced by MACRS

Deferred Taxes = (Accelerated Depreciation Straight Line Depreciation) x Tax%

The Deferred Tax annual amount is included in the calculation of Unlevered Free Cash Flow

The Unlevered Free Cash Flow elements thus are:

• EBIT
• D&A
• Deferred Tax
• Working Capital
• CapEx
• Taxes