1) EBIT of $20 million per year, including $2 million of depreciation expense related to a required $10 million upfront investment in new equipment,
2) Inventory of $2 million, accounts receivable of $2 million and accounts payable of $3 million, and
3) A facility that could otherwise be rented out for $5 million per year.
Your company's tax rate is 40%.
a) What is the change in Net Working Capital in year one?
increase in inv'y is a cash use, increase in A/R is a cash use, increase in A/P is a cash source...
-2m - 2m + 3m = -1m
b) What is the change in Net Working Capital in year two?
0 since it says you'll have the same amount in those accounts every year
c) What is the Free Cash Flow from the new business up front at time 0?
FCF = CFOps - Net CapEx...
assuming there were no cash flows from Ops (not given)...
(10m investment) + (1m change in NWC) = (11m)
d) What is the Free Cash Flow from the new business in year one?
[EBIT * (1 - tx) ] + depreciation
(20m * 0.60) + 2m = 14m
e) What is the Free Cash Flow from the new business year two? Since the numbers don't change for all five years...
14m
This is a weird set of questions since they don't tell you when the end of the project is, ask you to calculate the NPV, etc. They also give you SOME of the info to determine the opportunity cost of capital but they don't ask you to do anything with it - e.g. the alternative of getting $5m a year for renting out a building vs. investing $10m in new equipment. Hmmm.
Your company is contemplating a new business that will have, in each of the next five years:
1) EBIT of $20 million per year, including $2 million of depreciation expense related to a required $10 million upfront investment in new equipment,
2) Inventory of $2 million, accounts receivable of $2 million and accounts payable of $3 million, and
3) A facility that could otherwise be rented out for $5 million per year.
Your company's tax rate is 40%.
a) What is the change in Net Working Capital in year one?
b) What is the change in Net Working Capital in year two?
c) What is the Free Cash Flow from the new business up front at time 0?
d) What is the Free Cash Flow from the new business in year one?
e) What is the Free Cash Flow from the new business year two?
