Suppose that ACF shoes expects to sell 49,000 pairs of shoes for the next 3 years at $124 a pair. It costs $76 a pair to produce. The initial investment in equipment is $840,000, and it will depreciate straight-line to zero over three years. From year 4 onwards, 27,000 pairs of the shoes are expected to be sold at $105 a pair. The increased variable costs will be $86 a pair but no extra investment in equipment will be needed. This production can be carried out indefinitely. Find the free cash flows and find the value of the business when the cost of capital is 12.4% and the tax rate is 21%. [Hint: set up year 0 to year 3 as in chapter 6 to find the FCF (or the total asset cash flow) and find the FCF for year 4 but remember that there is no depreciation.] Show work in Excel Year OCF CF from Capital Investment CF from change in WC FCF 0 1 2 3 4

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose that ACF shoes expects to sell 49,000 pairs of shoes for the next 3 years at $124 a pair. It costs $76 a pair to
produce. The initial investment in equipment is $840,000, and it will depreciate straight-line to zero over three years. From
year 4 onwards, 27,000 pairs of the shoes are expected to be sold at $105 a pair. The increased variable costs will be $86
a pair but no extra investment in equipment will be needed. This production can be carried out indefinitely.
Find the free cash flows and find the value of the business when the cost of capital is 12.4% and the tax rate is 21%.
[Hint: set up year O to year 3 as in chapter 6 to find the FCF (or the total asset cash flow) and find the FCF for year 4 but
remember that there is no depreciation.]
Show work in Excel
Year
OCF
CF from Capital Investment
CF from change in WC
FCF
0 1 2 3 4
Transcribed Image Text:Suppose that ACF shoes expects to sell 49,000 pairs of shoes for the next 3 years at $124 a pair. It costs $76 a pair to produce. The initial investment in equipment is $840,000, and it will depreciate straight-line to zero over three years. From year 4 onwards, 27,000 pairs of the shoes are expected to be sold at $105 a pair. The increased variable costs will be $86 a pair but no extra investment in equipment will be needed. This production can be carried out indefinitely. Find the free cash flows and find the value of the business when the cost of capital is 12.4% and the tax rate is 21%. [Hint: set up year O to year 3 as in chapter 6 to find the FCF (or the total asset cash flow) and find the FCF for year 4 but remember that there is no depreciation.] Show work in Excel Year OCF CF from Capital Investment CF from change in WC FCF 0 1 2 3 4
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