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You are evaluating a new product. In year 3 of your analysis, you are projecting pro...

You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5 million and cost of goods sold of $3 million. You will be depreciating a $1 million machine for 5 years using straight-line depreciation. Your tax rate is 35%. Finally, you expect working capital to increase from $200,000 in year 2 to $300,000 in year 3. What are your pro forma earning from year 3? What are your pro forma free cash flows for year 3?

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Answer #1

Using excel to calculate proforma earnings and free cash flow at year 3

Sales $     5,000,000.00
COGS $     3,000,000.00
Depreciation $         200,000.00 (Depreciation = 1000000/5)
EBIT $     1,800,000.00 (EBIT = Sales- Cogs-Depreciation)
TAX $         630,000.00 Tax=EBIT*Tax Rate
Earnings $     1,170,000.00 Earnings =EBIT-Tax
Depreciation $     1,370,000.00
Net working capital $         100,000.00 (300000-200000)
free cash flow $     1,270,000.00 Free Cash flow=(Earnings+Depreciation-Net Working Capital)

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