2-3 Calculating Project FCF In the spring of 2015, Jemison Electric was considering an investment in a new distribution center. Jemisons CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $400,000 that will be depreciated over a five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year. Jemisons CFO estimates that the distribution center will need operating net working capital equal to 20% of EBIT to support operation. Assuming the firm faces a 30% tax rate, calculate the projects annual project free cash flows (FCFs) for each of the next five years where the salvage value of operating networking capital and fixed assets is assumed to equal their book values, respectively.

PROBLEM 2-3 696 $ $ Growth rate in EBIT for years 1-5 EBIT (year 1) CAPEX for year 0 Depreciable life of fixed assets Tax rate New working capital for years 1-5 Given 5% 100,000 400,000 5 years 30% 20% of EBIT Solution Year 0 1 2 3 5 EBIT Taxes NOPAT Plus: Depreciation Less: CAPEX Less: Net working capital needs (See Note 1 to 3) Plus: Salvage value of the fixed assets in year 5 Firm Free Cash Flow (FFCF) $ Net Fixed Assets (beginning of the year) Plus: CAPEX Less: Depreciation Expense for the Year Net Fixed Assets (end of the year)