Question

You are in the process of deciding whether or not to launch a new product. In year 3 of your analysis you project pro forma sales of $4,000,000 and cost of goods sold of $3,800,000. You will be depreciating a $300,000 machine for 5 years using straight-line depreciation. Your tax rate is 27%. Finally, you expect working capital to change from $220,000 in year 2 to 320,000 in year 3. What is your pro forma free cash flow for year 3

Answer 1

net cash flow $62,200

Step-by-step explanation:

The computation of the pro forma free cash flow for the year 3 is given below:

Pro forma sales $4,000,000

less cost of goods sold -$3,800,000

Profit before tax and depreciation $200,000

less Depreciation ($300,000 ÷ 5) $60,000

Profit before tax $140,000

less tax at 27% -$38,700

Profit after tax $102,200

add Depreciation $60,000

less change in working capital ($320,000 - $220,000) -$100,000

net cash flow $62,200