Consider the following annual projections of incremental balance sheet and incom
ID: 2636356 • Letter: C
Question
Consider the following annual projections of incremental balance sheet and income statement items for a three-year project (year 0 is today, year 1 is the end of year 1, etc.) under evaluation by Suki Autos Company.
Consider the following annual projections of incremental balance sheet and income statement items for a three-year project (year 0 is today, year 1 is the end of year 1, etc.) under evaluation by Suki Autos Company. What are the projected free cash flows of this project in years 0, 1, 2, and 3?Explanation / Answer
Free cash flow to firm = EBIT(1-t) + Depreciation & amortization - Capital expenditure - change in working capital
EBIT(1-t) is the unlevered net income
Change in net WC 0 1 2 3
Inventory 50000 50000 50000 50000
+Accounts receivable 0 10000 10000 0
-Accounts Payable 20000 20000 20000 0
Net working capital 30000 40000 40000 50000
change in WC 30000 10000 0 10000
Year 0: FCF = 0+0-150,000 - 30000 = -180,000
Year 1 : FCF = 70,000 + 50000 +0-10000 = 110,000
Year 2: FCF = 70,000 + 50000 +0-0 = 120,000
Year 3: FCF = 70,000 + 50000 +0-10000 = 110,000
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