Given : Automated sewing machine P200,000 Useful life 5 years Salvage Value 0 Ad

Question

Given : Automated sewing machine P200,000 Useful life 5 years Salvage Value 0 Additional Annual Revenues P360,000 Additional A/R 60,000 Additional Inventories 36,000 Increase in A/P 18,000 Net working capital compute Working capital returned in yr 5 Cost of Goods Sold 60% Annual Operating Expenses 5,000 Depreciation Expense compute Tax Rate 30% Required Rate of Return 20% Using Excel Filename VYE Calculation of Free Cash Flow template FCF vye worksheet Compute for 1. Free Cash Flow 2. Net Present Value 3. Internal Rate of Return 4. Profitability Incex 5. Cash Payback Period 6. Discounted Cash Payback Assuming Annual Sales Volume 30,000 Selling price per unit 12 Variable costs/ CGS 60% Depreciation already computed 7. Compute also for Breakeven volume

Explanation / Answer

free cash flow: Investment bankers compute Free Cash Flow using the following formula: FCFF = After tax operating income + Noncash charges (such as D&A;) - Capex - Working capital expenditures + Interest*(1-t)= Free Cash Flows to the Firm (FCFF) FCFE = Net income + Noncash charges (such as D&A;) - Capex - Change in Non Cash Working Capital + Net Borrowing = Free Cash Flows to the equity (FCFE) Or simply: FCFE = FCFF + Net borrowing - Interest*(1-t) net present value: Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms, where - the time of the cash flow - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital - the net cash flow i.e. cash inflow

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