Question

You are asked to compute the free cash flows for a project with a duration of 4 years. You receive the following relevant selected information: 0 1 2 3 4 5 Sales - 22.97 22.97 22.97 22.97 - Costs of goods Sold - 12.72 12.72 12.72 12.72 - Unlevered Net Income −6.56 4.71 3.45 7.35 3.96 −1.77 Depreciation - 2.95 2.95 2.95 2.95 2.95 In addition you know that 15% of sales and costs of goods sold are entering and exiting working capital every period. What is the free cash flow over the whole duration of the project? (rounded to two decimal places)

Select one: a. −21.31;0.22;0.5;4.4;1.01;−3.18 b. −21.31;9.2;6.4;10.3;6.91;−0.36 c. −21.31;6.12;6.4;10.3;6.91;2.72 True. d. −6.56;0.22;0.5;4.4;1.01;−3.18 e. −18.36;0.22;0.5;4.4;1.01;−3.18

Answer 1

Answer : C --> -21.31; 6.12; 6.4; 10.3; 6.91; 2.72

Free Cash Flow = Unlevered Net Income + Depreciation - Capital Expenditure + Change In Net Working Capital

For Year 1,2,3,4 Working Capital = 15% Of (Sales - Cost Of Goods Sold) = 0.15*(22.97-12.72) = 1.54

Change In Working Capital For Year 1 = 1.54 - 0 = +1.54

Change In Working Capital for year 2,3,4 = 1.54-1.54 = 0

Change In Working Capital for year 5 = 0-1.54 = -1.54

Free Cah Flow Year 1 = 4.71 + 2.95 - 0 - 1.54 = 6.12

Free Cah Flow Year 2 = 3.45 + 2.95 - 0 - 0= 6.4

Free Cah Flow Year 3 = 7.35 + 2.95 - 0 - 0= 10.3

Free Cah Flow Year 4 = 3.96 + 2.95 - 0 - 0= 6.91

Free Cah Flow Year 5 = -1.77+ 2.95 - 0 - (-1.54) = 2.72

Below is the table of the working:

Year	Unlevered Net Income	Depreciation	Sales	Cost Of Goods Sold	Sales - COGS	Working Capital	Change In Working Capital	Free Cash Flow
0	-6.56	0	0	0	0	0	0	-21.31
1	4.71	2.95	22.97	12.72	10.25	1.54	1.54	6.12
2	3.45	2.95	22.97	12.72	10.25	1.54	0.00	6.40
3	7.35	2.95	22.97	12.72	10.25	1.54	0.00	10.30
4	3.96	2.95	22.97	12.72	10.25	1.54	0.00	6.91
5	-1.77	2.95				0.00	-1.54	2.72