A firm is considering the purchase of a machine to produce t

A firm is considering the purchase of a machine to produce tin cans, which would represent an investment of $26 million, and would be depreciated in a straight-line basis over 5 years. Sales are expected to be $16 million per year, and operating costs 57% of sales. The company is currently paying $1 million in interest per year, has a tax rate of 40%, and a WACC of 10%. What is the company’s free cash flow for year 1 of this project?

Solution

FCFF for year 1= EBit*(1-tax)+Depreciation-cap ex-net increase in working capital
EBit=sales-op costs-depreciation
=16-(57%*16)-(26/5)
=1.68mn
FCFF for year 1=(1.68*(1-40%))+(26/5)
=6.208mn