Question

Suppose for a project X, it is estimated to have the following financials in Year 0 and Year 1. Suppose the project requires to buy a new piece of equipment which costs $9,000. It has a useful life of three years and a salvage value of $0 at the end of 3rd year. The changes in NWC (NOT the cash effect of change in NWC) at Year 0 and Year 1 are $5,000 and $2,000 respectively. The free cash flow (FCF) at Year 1 is $____

(HINT: pay attention to the signs).

	Year 0	Year 1
Unlevered net income	0	20,000
Depreciation	0	3,000
Change in Net Working Capital	5,000	2,000
Captial Expenditure	9,000	0

Answer 1

Year 0	Year 1
Unlevered net income	0	20,000
Depreciation	0	3,000
Change in Net Working Capital	5,000	2,000
Captial Expenditure	9,000	0

So the income is stated to be 20000 at year 1.

depreciation will be 3000.

change is working capital is year 0 5000 and year 1 is 2000.

capital expenditure is 9000.

to find the answer we need to deduct the year 0 cash outflow and year 1 cash inflow - outflow.

particulars year 0 year 1

uneveled net income 0 20000

Less: depreciation 0 (3000)

change in working capital (5000) 2000

capital expenditure (9000) 0

Total Cash flow     ( 14000) 19000

The free cash flow (FCF) at Year 1 is $ 5000.

Note working capital at year 0 was 5000 . but we utilised 3000 in year 1 which brought down the working capital to 2000.

so to adjust the balance we use accounting by -5000 ( initial provision) + 2000 ( remaing balance)

its give use a cash utilisation of -3000.