Question

Aunt Sally's Sauces Inc., is considering expansion into a new line of all natural, cholesterol-free, Sodium-free, fat-free, low-calorie tomato sauces. Sally has paid $22,000 for a marketing study which indicates that the new product line would have sales of $620,000 per year for the next six years. Manufacturing plant and equipment would cost $600,000 and will be depreciated using the following annual depreciation rates: 0.2,0.32,0.1920, .1152,0.1152,0.0576. The fixed assets will have no market value at the end of six years. Annual fixed costs are projected at $80,000 and variable costs are projected at 64% of sales. Net operating working capital requirements are $75,000 for the six-year life of the project: the outlay for working capital will be recovered at the end of six years. Aunt Sally's tax rate is 25% and the firm requires a 12% return. The projected Free Cash Flow(FCF) in the first year is $___?

Answer 1

Particular	Amount	Calculation
Sales	620,000
(-) variable cost (64%)	(396,800)	(Sales * 64%) 620,000*0.64
(-) fixed cost	(80,000)
(-) depreciation (0.2)	(120,000)	(Cost of plant and equipment * depreciation rate for year 1) 600,000*0.2
EBT	23,200
(-)Tax (25%)	(5800)	(EBT * Tax rate) 23,200*0.25
Net income	17,400
(+) Depreciation (0.2)	120,000	600,000*0.2
Free Cash flow	137,400

 

 Thus, the free cash flow for year 1 is $137,400.

 Thus, the free cash flow for year 1 is $137,400.