Old Exam Questions  Financial Statements, Cash Flow, and Taxes  Solutions
Page 42 of 73 Pages
= $12,000  $5,015 = $6,985
Δ
NOWC = $6,985  $6,100 = $885
NFA
2003
= $6,750
NFA
2004
= $7,500
Δ
NFA = $7,500  $6,750 = $750
Δ
GFA =
Δ
NFA + DEP = $750 + $750 = $1,500
NOPAT
2004
= ($2,250)(1.35) = $1,462.50
OCF
2004
= NOPAT
2004
+ DEP = $1,462.5 + $750 = $2,212.50
FCF
2004
= NOPAT
2004

Δ
NOWC 
Δ
NFA = $1,462.50  $885  $750 = $172.50
FCF
2004
= OCF
2004

Δ
NOWC 
Δ
GFA = $2,212.50  $885  $1,500 = $172.50
Proof
:
FCF

$172.50
Interest

$250.00
Tax Shelter
+ $ 87.50
Dividends

$315.00
Notes Payable
+ $650.00
Total
$ 0.00
42.
Assume that your firm plans to take on a project that will have an infinite life and produce
the free cash flows listed below. Also assume that the $10,000 invested in Year 0 was
supplied by investors as $5,000 of debt, at a beforetax cost of debt of 5 percent, and
$5,000 of equity, at a cost of equity of 12 percent. Finally, you may assume that the
firm’s tax rate is 40 percent. Given this data, determine the net present value of this
project.
Year
OCF
∆
NOWC
∆
GFA
FCF
0
$0
$4,000
$6,000
$10,000
1
$1,200
$0
$0
$1,200
2
$1,200
$0
$0
$1,200
3
$1,200
$0
$0
$1,200
…
$1,200
$0
$0
$1,200
…
$1,200
$0
$0
$1,200
∞
$1,200
$0
$0
$1,200
A.
$3,000
*
B.
$6,000
C.
$4,000