Question

1. What yearly cash flows are relevant for this investment decision? Do not forget the effect of taxes and the initial investment amount. Complete the table below using the detail summarized below:
   1. Investment :Initial Investment - $16M 2016, $2M 2017/Working Capital - 10% of Incremental Sales
   2. Operating Savings - $2M 2017, $3.5M 2018-2022
   3. Sales Revenue - $4M 20017, $10M 2018-2022
   4. Expenses - CGS – 75% of Revenue, SG&A - 5% of Revenue
   5. Salvage:Working Capital - recoverable at cost/Initial Investment - 10% or $1.8M before tax, $1.08M after taxes
   6. Depreciation – Straight Line over 6 years, no salvage, start in 2017

	2016	2017	2018	2019	2020	2021	2022
Investment:
Capital Outlay
Net Working Capital (10% Sales)
Total Investment
Investment Recovery :
Equipment Salvage
Net Working Capital (full recovery)
Earnings before Interest and Taxes (EBIT):
Sales Revenue
Cost of Goods Sold (75% Sales)
SG&A (5% Sales)
Operating Savings
Depreciation ($18,000/6)
Total Costs & Expenses
EBIT
- Taxes (40%)
NOPAT
+ Depreciation
- Investment
= Free Cash Flow

Answer 1

Investment Calculations
	2016	2017	2018	2019	2020	2021	2022
Investment:
Capital Outlay	(16,000,000)	(2,000,000)	-	-	-	-	-
Net Working Capital (10% of Sales)		(400,000)	(600,000)	-	-	-	-
Total Investment	(16,000,000)	(2,400,000)	(600,000)	-	-	-	-
Investment Recovery:
Equipment Salvage (after tax) (1800000*.6)	-	-	-	-	-	-	1,080,000
Net working Capital recovery (full)	-	-	-	-	-	-	1,000,000
Net Investment	(16,000,000)	(2,400,000)	(600,000)	-	-	-	2,080,000
NOPAT Calculations
	2,016	2,017	2,018	2,019	2,020	2,021	2,022
Sales	-	4,000,000	10,000,000	10,000,000	10,000,000	10,000,000	10,000,000
Cost of Goods Sold (75% Sales)	-	(3,000,000)	(7,500,000)	(7,500,000)	(7,500,000)	(7,500,000)	(7,500,000)
Gross Profit	-	1,000,000	2,500,000	2,500,000	2,500,000	2,500,000	2,500,000
SG&A (5% Sales)	-	(200,000)	(500,000)	(500,000)	(500,000)	(500,000)	(500,000)
Operating Savings		2,000,000	3,500,000	3,500,000	3,500,000	3,500,000	3,500,000
EBITDA		2,800,000	5,500,000	5,500,000	5,500,000	5,500,000	5,500,000
Depreciation		(3,000,000)	(3,000,000)	(3,000,000)	(3,000,000)	(3,000,000)	(3,000,000)
EBIT		(200,000)	2,500,000	2,500,000	2,500,000	2,500,000	2,500,000
Tax @40%		-	(1,000,000)	(1,000,000)	(1,000,000)	(1,000,000)	(1,000,000)
NOPAT		(200,000)	1,500,000	1,500,000	1,500,000	1,500,000	1,500,000
Cash Flow Calculations
NPOAT	-	(200,000)	1,500,000	1,500,000	1,500,000	1,500,000	1,500,000
+ Depreciation	-	3,000,000	3,000,000	3,000,000	3,000,000	3,000,000	3,000,000
- Investment	(16,000,000)	(2,400,000)	(600,000)	-	-	-	2,080,000
Free Cash Flow	(16,000,000)	400,000	3,900,000	4,500,000	4,500,000	4,500,000	6,580,000