A project is being considered that has the following:

1. $40 million of capital equipment up front. Assume straight line depreciation for the capital equipment over five years

2. Staring in year one, sales revenue is to be $5 million per year.

3. Costs are anticipated to be 40% of sales.

4. Operations will generate accounts receivable equal to 40% of sales and accounts payable equal to 40% of costs, both starting in year one.

5. The corporate tax rate is 21%.

 

Question:

With this information, forecast the free cash flows for this project for years 0, 1 and 2. 

 

Suppose you thought that after year two, free cash flow would grow at 3% per year indefinitely. If the cost of capital for this project is 8%, what adjustment would you make to year two free cash flow to account for the future cash flows to come after year two?