Operating cash flows and depreciation

saragod85 · #1 Apr 25, 2008, 08:52 AM

I have a question in my homework here.. and I CAN NOT figure out the right equation to find it and can NOT find examples for it..so ANY help would be great!! I will post the question and I am not expecting an answer just help!!! THANKS!

McDermott Technologies is evaluating a new project that requires $800,000 in new equipment. McDermott estimates that the new project will generate $900,000 in annual sales at the end of each of the next four years and that operating costs (excluding depreciation) will equal $400,000. Suppose the firm depreciates the equipment using the straight-line method over four years and the firm’s tax rate is 40%. If the project’s WACC is 9.5%, what is the present value of the projects OCF’s?

Then the SECOND part of the question is.....

2.Suppose that McDermott uses Modified Accelerated Cost Recovery System (MACRS) depreciation rates instead. The applicable rates are 33%, 45%, 15%, and 7%, respectively. Recalculate the firm’s OCFs and find their present value now (still assuming the WACC of 9.5%,



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