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 $37 million, and would be depreciated in a straight-line basis over 5 years. Sales are expected to be $12 million per year, and operating costs 40% 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?

Enter your answer in millions of dollars, rounded to 2 decimals, without the dollar sign. So, if your answer is 4.5678, just enter 4.57.

Solution

Sales $           12.00 million Operating costs (40%) $             4.80 million Depreciation = 37/5 = $             7.40 million NOI $           -0.20 million Tax at 40% $           -0.08 million NOPAT $           -0.12 million Add: Depreciation $             7.40 million Free cash flow $             7.28 million