accelerated schedule of depreciation). You have a choice to use 3 year MACRS depreciation schedule( see the Excel sheet attached) If you recommend setting up the plant, you should also consider that the plant will require land which the firm can put to other uses. These alternative uses will earn the firm $ 15 M annually. Modeling Financial Metrics and Cash FlowsDepreciation You have to decide whether Zeta should set up the plant to produce the Spenza’ s by answering the following series of questions. After having enumerated the various cash flows you are now ready to analyze the project using capital budgeting techniques and project analysis methods.
� What will be the depreciation for tax purposes from the investment in the Spenza plant using the straight line method? What will be the depreciation using MACRS? Which schedule would you recommend to use?
EBIT
� What will be the costs and revenues for the first four years? What will be the incremental EBIT( Earnings before Interest and Taxes) each year?
Interest and Taxes You now have to need to determine interest costs and taxes. Assume that the cost of setting up the plant will be 50 % financed by debt with an interest rate of 7 %. At this point you are getting closer to the cash flows the project will produce, and need to determine the tax rate. You research tax rates and determine that the appropriate tax rate is 40 %.
� What incremental taxes Zeta will pay if the Spenza plant is set up?
Net Income
� What will be the incremental Net Income for Zeta from the project each year?
Incremental OCF Now you can calculate the net increase in cash flows from the project.
� What will be the incremental OCF( Operating Cash Flow) each year? Free Cash Flow