Finc Quiz #3 Suppose Company ABC has revenues of $350 million, cost of goods sold of $100 million, and depreciation of $50 million. What is the company’s EBIT? o 350-100=50=200M To get to Free Cash Flows from accounting earnings o Add back depreciation and amortization and subtract capital expenditures A project requires an initial investment of $670,000 depreciated straight-line to $0 in 16 years. The investment is expected to generate annual sales of $240,000 with annual costs of $120,000 for 16 years. Assume a tax rate of 30% and a discount rate of 10%. What is the NPV of the project? o Annual depreciation=(Cost-Salvage value)/USeful Life o =$41875/year o Hence annual OCF=(Sales-Costs)(1-tax rate)+Tax savings on Annual depreciation o =(240,000-120,000)(1-0.3)+(0.3*41875) o =$96562.5 o Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate o =$96562.5[1-(1.1)^-16]/0.1 o =$96562.5*7.823708642 o =$755476.87 o NPV=Present value of inflows-Present value of outflows o =$755476.87-$670,000 o =$85476.87 Is it possible for a firm to have positive net income and yet to have cash flow problems?
- Fall '19
- Depreciation, Free cash flows, Generally Accepted Accounting Principles