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 $40 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 53% 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

Sales         12.00 Less:Cost (53%)           6.36 Less: Depreciation (40/5)           8.00 EBIT -        2.36 Less: Interest           1.00 EBT -        3.36 Less: Tax @40% -        1.34 EAT -        2.02 Add: Depreciation           8.00 Free Cash Flow for year 1           5.98