Question

A firm is considering the purchase of a machine to produce tin cans, which would represent an investment of $37 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 40% 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?

Enter your answer in millions of dollars, rounded to 2 decimals, without the dollar sign. So, if your answer is 4.5678, just enter 4.57.

Answer 1

Sales	$           12.00	million
Operating costs (40%)	$             4.80	million
Depreciation = 37/5 =	$             7.40	million
NOI	$           -0.20	million
Tax at 40%	$           -0.08	million
NOPAT	$           -0.12	million
Add: Depreciation	$             7.40	million
Free cash flow	$             7.28	million