Question

The machine produces annual units of 1,000 units. Each unit has sale price of $200 per unit and cost of $100 per unit. Sale price and cost will increase 3% per year. The tax rate is 25%.

If NWCt= 12% * Sale (t+1), what is FCF at year 2?

Given the machine is bought at $200,000 with shipping cost of $10,000 and installation cost of $30,000. The machine has economic life of 4 years.

Year MACRS
1 33%
2 45%
3 15%
4 7%

1) $103,508.40
2) -$6,250
3) $102,080
4)$145,600
5)$94,080

Answer 1

Calculation of the free cash flows in year 2 :-

Calculation of the depreciation in year 2 :-

depreciation in year 2 = total cost of machine * MACR rate = ( 200,000 + 10,000 + 30,000) * 45% = $ 108,000

Increase / decrease in working capital :-

Working capital in year 1 = 12% of year 2 sales = 12% * 1000 units * (200 *1.03) = 24,720

Working capital in year 2 = 12% of year 3 sales = 12% * 1000 units * (200 *(1.03)2) = 25,461.6

Increase in working capital = 25,461.6 - 24,720 = $ 741.6

Particulars	amount	calculation
sales revenue in year 2	206,000	=1000*200*1.03
Less- cost	(103,000)	= 1000 * 100* 1.03
profit before depreciation and tax	103,000
Less- Depreciation	(108,000)
Profit / (loss) before tax	(5000)
Less- (tax) / tax shield	1250
Profit / (loss) after tax	(3,750)
Add- Depreciation	108,000
operating free cash flows	104,250
Less- Increase in working capital	(741.6)
Free cash flows in year 2	103,508.4

option 1 is correct.