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