2-3 CALCULATING PROJECT FCF In the spring of 2015, Jemison Electric was consider

Question

2-3 CALCULATING PROJECT FCF In the spring of 2015, Jemison Electric was considering an investment in a new distribution center. Jemison's CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $400,000 that will be depreciated over a five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year. Jemison's CFO estimates that the distribution center will need operating net working capital equal to 20% of EBIT to support operation.

Assuming the firm faces a 30% tax rate, calculate the project's annual project free cash flows (FCFs) for each of the next five years where the salvage value of operating net working capital and fixed assets is assumed to equal their book values, respectively.

Explanation / Answer

Year Initial Investment tax 30% NOPAT depreciation profit after tax before depreciation working capita 20% Free cash flow 0 400000 1 100000 30000 70000 80000 150000 20000 130000 2 105000 31500 73500 80000 153500 21000 132500 3 110250 33075 77175 80000 157175 22050 135125 4 115762.5 34728.75 81033.75 80000 161033.8 23152.5 137881.3 5 121550.6 36465.19 85085.44 80000 165085.4 24310.13 140775.3 6 127628.2 38288.45 89339.71 89339.71 25525.63 63814.08 6 amount of working capital recovered 136038.3

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