Question

Continuing from Problem 1, at the end of the first year, Chemtec is expecting sales of $250 million and costs of $125 million.

There are no more required investments in either net working capital or plant and equipment.
However, the existing plant and equipment will experience $50 million of depreciation.

Assume that Chemtec's marginal tax rate on earnings is 35%.

Assuming that all of these cash flow occur at the end of the first year, what is the first year's free cash flow?

*Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.

Answer 1

Free cash flows are cash flows that are left after reinvestment and retention of cash for the business purposes.

Free Cash flow = Revenue - Costs - Investments in Working capital - other Investments- Taxes (W1)

We didn't include non cashflow items in the Free cash flow computation unless we are given an amount which has non cash flow item's impact included. The example includes PBIT, in this case we have to remove the impact of non cash items from it, to do so we add back depreciation to have cash nature value.

By putting the values, we have:

Free Cash flow = $250m - $125m - 0 - 0 - $26.25m= $98.75m

Step-by-step explanation:

Working 1: Taxes

I assume that the tax allowable depreciation is $50m.

So the corporation tax= ($250m - $125m - $50m)*35%= $26.25m