DO NOT ANSWER IF YOU HAVENT READ MY ENTIRE POST AND KNOW THE ANSWER TO WHAT I NE

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DO NOT ANSWER IF YOU HAVENT READ MY ENTIRE POST AND KNOW THE ANSWER TO WHAT I NEED HELP ON! THIS IS MY 3RD TIME ASKING THE SAME QUESTION.

Gizmo Inc has outstanding 30-year bonds with an 8% coupon rate, annual payments selling for $1,150. Its preferred stock is selling for $75 and pays a fixed dividend of $7.5. Gizmo Inc. common stock is selling for $100 and has a beta of 2. The last dividend paid was $10 and dividends are expected to grow at 10% a year. The target Capital structure calls for 30% debt, 10% Preferred Stock, and 60% Common Equity.

Gizmo Inc. is considering the purchase of a new machine to replace an old one. The original cost of the old machine was $50,000; it is now 1 year old and has a market value of $33,500. It is being depreciated using the MACRS 3-year class life and can be used for three more years at which time it will be worthless. The cost of the replacement machine is $100,000, has a useful life of 3 years, and an estimated market value of $14,000 at the end of three years. Sales are expected to increase by $75,000 per year. The new machine will be depreciated using the MACRS 3-year class life.

The firm has a marginal tax rate of 40%. The MACRS 3-year class life rates are 33%, 45%, 15% and 7%.

I have figured out the before-tax cost of debt, which is: 6.8%

After tax cost of debt is: 4.1%

preferred stock: 10%

common equity: 21%

WACC: 14.8%

MY QUESTION IS: What is the change in depreciation for years 1,2,3 and What is the FCF for years 0,1,2,3?

Explanation / Answer

Year 1

Depreciation with old asset = 45%*50000 = 22500

Depreciation with new asset = 33%*100000 = 33000

change is = 33000 - 22500 = 10500

Year 2

Depreciation with old asset = 15%*50000 = 7500

Depreciation with new asset = 45%*100000 = 45000

change is = 45000 - 7500 = 37500

Year 3

Depreciation with old asset = 7%*50000 = 3500

Depreciation with new asset = 15%*100000 = 15000

change is = 15000 - 3500 = 11500

Free cashflows

year 0 = -100000 + 33500 = -66500

year 1 = (75000 - 33000)*(1-40%) + 33000 = 58200

year 2 = (75000 - 45000)*(1-40%) + 45000 = 63000

year 3 = (75000 - 15000)*(1-40%) + 15000 + 14000*(1-40%) = 59400

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