Free Cash Flows (FCFs) are defined as cash flows from operations, which are free to be distributed to the stakeholders. (Refer 12-1A)

Periodic FCF = [ EBIT(1-T) + Dep&Amort] - [ Cap. Exp. + Net Oper. Work. Cap.] Requirements (Refer 12-2):

Assume a new assembly line for an expansion project PXP. You are given the following:

Initial Capital Investment / Expenditure (Year 0) = $250,000

Dep&Amort = 20% of Capital Exp. during each of the Five years (Straight- line) Economic Life of the Project = 5 years

Salvage value (Year 5) = $20,000 Tax Rate @ 25%

Incr.Net Oper. Work. Cap (Year 1) = 70,000 (50% recovered with salvage value) Operations:

Sales (Years 1-5) =  50,000, 75,000, 100,000, 150,000. 200,000

 

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Capital Investment (Capex)	-250,000
Incr Net Oper WC		-70,000
Unit Sales
Revenue (@$2.50/unit)
Less COGS (@60%)
less Fixed Oper Costs
Tot. Oper Costs
EBIT
Tax (@25%)
EBIT (1-T)
Add Back Depreciation
Salvage Value
Recover 50% of Work Cap
FCFs
WACC (@15%)
NPV
IRR