2. You are now ready to determine the free cash flow. Compute the free cash flow for each year using Eq. 9.6 from this chapter: Unlevered Net Income Free Cash Flow (Revenues - Costs - Depreciation) x (1 - Tax Rate) +Depreciation - CapEx - Change in NWC Set up the timeline and computation of the free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive.

a. Assume that the project's profitability will be similar to HP's existing projects in 2012 and estimate (Revenues - Costs) each year by using the 2012 EBITDA/Sales profit margin.

b. Determine the annual depreciation by assuming HP depreciates these assets by the straight-line method over a 10 year life.

c. Determine HP's tax rate by dividing HP's income taxes by its income before tax in 2012.

d. Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use HP's 2012 NWC/ Sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the project's required NWC-e.g., HP's cash holdings.)

e. To determine the free cash flow, calculate the additional capital investment and the change in net working capital each year.