Consider a project by John, Inc manufacturing custom laptop cases. They have bought a machine for $30,000 to help them manufacture these cases. They expect to sell 2,000 cases in year 1. They expect this number to grow by %10 per year for years 2 and 3. At that point, the project will end. The cost of manufacturing each case is $9 while they think they can charge $18 for each case.

They want to increase their networking capital accounts. They dont need any extra cash but they would like to hold 5% of next year's annual sales in account receivable, 10% of next year's annual sales in inventory, and 5% of next year's annual sales in accounts payable. (That is, saving for working capital starts in year 0.) Assume that the company will be able to recover all their NMW in the final year of their projects. The equipment is expected to be depreciated straight-line to $0 over 3 years.

Assume that John is in the 20% tax bracket. The cost of capital for this project is 10%.

Fill in incremental earnings forecast:

Year 0 1 2 3

Incremental

Earnings

Now suppose the incremental earnings are given below. Fill in the rest of the table to get the Free Cash Flows for each year.

Year	0	1	2	3
Incremental Earnings	0	6000	7350	8835
Depreciation	0
Capital Expenditure	0
Increases in NWC
FCF