Let's Win Sports currently focuses on the soccer and football markets. It is contemplating entering the basketball market and assesses the risk of the new venture to be similar to that of the existing company.

Your RBS summer intern created a summary for Let's Win Sports' potential in the basketball market over the next 5 years:

- Initial investment today is estimated to be $2,000,000

- Revenue is expected to be $5,000,000 in the first year and grow 10% per year for the next 4 years.

- Variable cost is expected to be 40% of revenue

- Fixed cost (including depreciation) is expected to be $1,500,000 of revenue each year

- Depreciation expense is expected to be $100,000 each year

- Maintenance capex is expenced to be $300,000 each year

- Working capital is expected to be 10% of revenue

- Taxes are 35%

Additionally, here is a summary of the capital structure for Let's Win Sports

	Book Value	Price Per Share	Units Outstanding	Coupon Rate	Term
Senior bonds	$10,000,000	$1,000	10,000	9%	7
Common stock	$20,000,000	$15	2,000,000	-	-

Other info:

Beta	1.2
Treasury Bills Yield	3%
Expected return on market	10%

What is Free Cash Flow?

I know the Free Cash Flows for the next 5 years are as follows:

Initial Investment	Year 1	Year 2	Year 3	Year 4	Year 5
(2,000,000)	275,000	420,000	579,500	754,950	947,945

But can someone explain to me how these cash flows were calculated? Detailed steps and explanation would be appreciated.