Question

Year 1 Year 2

Revenues 128.9 151.6

COGS and Operating Expenses (other than depreciation) 49.6 52.7

Depreciation 24.9 43.5

Increase in Net Working Capital 3.4 8.1

Capital Expenditures 27.3 43.2

Marginal Corporate Tax Rate 35% 35%

a. What are the incremental earnings for this project for years 1 and​ 2?​ (Note: Assume any incremental cost of goods sold is included as part of operating​ expenses.)

b. What are the free cash flows for this project for years 1 and​ 2?

Incremental Earnings Forecast (millions)		Year 1
Sales	$
Operating Expenses	$
Depreciation	$
EBIT	$
Income tax at 35%	$
Unlevered Net Income	$

Answer 1

	Year 1	Year 2
Revenues	128.9	151.6
COGS and Operating Expenses (other than depreciation)	49.6	52.7
Depreciation	24.9	43.5
Increase in Net Working Capital	3.4	8.1
Capital Expenditures	27.3	43.2
Marginal Corporate Tax Rate	35%	35%

a. What are the incremental earnings for this project for years 1 and​ 2?​

	Year 1	Year 2
Revenues	128.9	151.6
- COGS and Operating Expenses (other than depreciation)	49.6	52.7
- Depreciation	24.9	43.5
= incremental earning before tax	54.4	55.4
- Tax expenses @ 35%	19.04	19.39
= Incremental earning (earning after taxes)	35.36	36.01

b. What are the free cash flows for this project for years 1 and​ 2?

Formula for Free cash flow

Revenue

- Cogs and Operating Expenses ( include depreciation)

= EBIT (earning before interest and taxes)

- taxes

= Net income

+ depreciation

- increase in NET working capital

- CAPEX

Calculation

	Year 1	Year 2
Revenues	128.9	151.6
- COGS and Operating Expenses (other than depreciation)	49.6	52.7
- Depreciation	24.9	43.5
= EBIT (earning before interest and taxes)	54.4	55.4
- Tax expenses @ 35%	19.04	19.39
= Net income	35.36	36.01
+ depreciation	24.9	43.5
- increase in NET working capital	3.4	8.1
- CAPEX (Capital Expenditures)	27.3	43.2
Free Cash Flow (FCF)	29.56	28.21