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 $28 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 52% 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

By formula,

FCFF = EBIT * (1 - Tax Rate) + Depreciation

So, in order to calculate the FCFF, we need to calculate EBIT and Depreciation

Depreciation per year = $28 mil/5 = $5.6 mil

EBIT = Sales - Operating Expenses - Depreciation = Sales - (52% of Sales) - Depreciation = 48% of Sales - Depreciation = (48% * 12 mil) - 5.6 mil = 5.76 mil - 5.6 mil = 0.16 mil

FCFF = 0.16 mil * (1 - 40%) + 5.6 mil = $5.696 mil