You have been retained as a consultant by a business that is considering production of a new product.

This production would require an initial capital outlay of $100 million. This capital expenditure can

be depreciated (straight line) over a 4-year life of the project with no salvage value. Assume the firm faces a 25% marginal tax rate and a cost of capital of 8%.

The Cash Flow and Economic Profit for each year. Reminder, the "year 0"is included to capture the initial outflow in the CF analysis. Show your work.

Cash Flow Economic Profit

Year 0 ($100,000,000) 0

Year 1 $35,250,000 $28,250,000

Year 2 $40,000,000 $32,000,000

Year 3 $40,000,000 $32,000,000

Year 4 $43,750,000 $35,750,000

Now assume that the market value of the capital does not decrease as suggested by straight line accounting depreciation, but rather that the market value of the capital is given as listed below (in other words, accounting and economic depreciation are not the same).

At end of year 1 $60,000,000

At end of year 2 $35,000,000

At end of year 3 $15,000,000

At end of year 4 $0