2-3 CALCULATING PROJECT FCF In the spring of 2015, Jemison Electric was consider-ing an investment in a new distribution center. Jemison?s 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. Jemison?s 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 project?s annual project free cash flows (FCFs) for each of the next five years where the salvage value of operating network-ing capital and fixed assets is assumed to equal their book values, respectively. Added excel template

PROBLEM 2-3 Given Growth rate for years 1-5 EBIT (1) CAPEX for year 0 CAPEX for years 1-5 Depreciation Expense Tax rate Debt Retirements for years 1-5 New working capital for years 1-5 $ $ Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 5% 100,000 400,000 - per year over and above annual depreciation expense 30% 15,000 per year 20% of new EBIT $ Solution Year 0 EBIT Taxes NOPAT Plus: Depreciation Less: CAPEX Less: New working capital needs (Note 1) Plus: Salvage value of the fixed assets in year 5 (assumed to equal its book value) (Note 2) 1 2 3 4 5 Note 1: At the end of year 5 the total investment in working capital is returned to the firm in an amount equal to its book value. 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) $ - Note 2: We define the terminal value of the project's fixed assets as the net fixed asset balance at the end of year 5. PROBLEM 2-7 Given Solution Legend Investment (CAPEX in year 0) $ Depreciable life Initial units for year 1 Revenue per unit Growth Rate per year in units recycle Tax Rate Disposal cost per unit $ Required Return (600,000) 5 years 100,000 1.50 25% 30% 0.20 15% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution: Part a Year 0 1 Units recycled Revenues Depreciation Expense EBIT Less: Taxes NOPAT Plus: Depreciation expense Less: CAPEX Project Free Cash Flows 2 - 3 - 4 - 5 ### - Solution: Part b NPV IRR Solution: Part c Year 0 Units recycled Revenues Depreciation Expense EBIT Less: Taxes NOPAT Plus: Depreciation expense Less: CAPEX Project Free Cash Flows 1 2 3 4 5 75,000 (600,000) (600,000) $ - - - ### - NPV IRR Solution: Part d Year 0 Units recycled Revenues Disposal cost Depreciation Expense EBIT Less: Taxes NOPAT Plus: Depreciation expense Less: CAPEX Project Free Cash Flows NPV IRR 1 2 - 3 - 4 - 5 ###