Question

1) As you plan for a new corporate project, you find that during the first year of the project's life the expectation is that revenues will total $100,000, variable costs will be 60% of revenues, fixed costs will be $30,000, and depreciation will be $10,000. Given a corporate tax rate of 40%, find the free cash-flow for the first year of the project. Enter your number in dollars, with no decimals.

2) Same as for the question above, you plan for a new corporate project, and find that during the first year of the project's life the expectation is that revenues will total $100,000, variable costs will be 60% of revenues, fixed costs will be $30,000, and depreciation will be $10,000. Now, you believe that revenues are likely to increase at the rate of 5% per year every year, while the rest of the data remains as described before. Given a corporate tax rate of 40%, find the free cash-flow for the second year of the project. Enter your number in dollars, with no decimals

Answer 1

Q. 1). Solution :- Calculation of free cash flow of project in Year 1 :-

Particulars	Amount ($)
Revenue (-) Variable costs (-) Fixed costs	100000 60000 (60 % of 100000) 30000
Earnings before depreciation, interest and tax (-) Depreciation	10000 10000
Earnings before tax (-) Tax (40 % of 0)	0 0
Net income (+) Depreciation (non cash expense)	0 10000
Free cash flow for Year 1	10000

Q. 2). Solution :- Calculation of free cash flow of project in Year 2 :-

Particulars	Amount ($)
Revenue (100000 + 5 % of 100000) (-) Variable costs (-) Fixed costs	105000 63000 (60 % of 105000) 30000
Earnings before depreciation, interest and tax (-) Depreciation	12000 10000
Earnings before tax (-) Tax (40 % of 2000)	2000 800
Net income (+) Depreciation (non cash expense)	1200 10000
Free cash flow for Year 2	11200

Conclusion :-

1). Free cash flow of project for Year 1	$ 10,000.
2). Free cash flow of project for Year 2	$ 11,200.