Free Cash Flows (FCFs) are defined as cash flows from operations, which are free to be distributed
Question:
Free Cash Flows (FCFs) are defined as cash flows from operations, which are free to be distributed to the stakeholders. (Refer 12-1A)
Periodic FCF = [ EBIT(1-T) + Dep&Amort] - [ Cap. Exp. + Net Oper. Work. Cap.] Requirements (Refer 12-2):
Assume a new assembly line for an expansion project PXP. You are given the following:
Initial Capital Investment / Expenditure (Year 0) = $250,000
Dep&Amort = 20% of Capital Exp. during each of the Five years (Straight- line) Economic Life of the Project = 5 years
Salvage value (Year 5) = $20,000 Tax Rate @ 25%
Incr.Net Oper. Work. Cap (Year 1) = 70,000 (50% recovered with salvage value) Operations:
Sales (Years 1-5) = 50,000, 75,000, 100,000, 150,000. 200,000
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
Capital Investment (Capex) | -250,000 |
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Incr Net Oper WC |
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Unit Sales |
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Revenue (@$2.50/unit) |
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Less COGS (@60%) |
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less Fixed Oper Costs |
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Tot. Oper Costs |
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EBIT |
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Tax (@25%) |
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EBIT (1-T) |
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Add Back Depreciation |
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Salvage Value |
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Recover 50% of Work Cap |
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FCFs |
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WACC (@15%) |
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NPV |
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IRR |
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Intermediate Financial Management
ISBN: 978-1285850030
12th edition
Authors: Eugene F. Brigham, Phillip R. Daves