Question: An expansion has the following projects for the next 2 years [in millions] & after year 3 the net free cash flows are expected to grow at 6 percent forever. The company's cost of capital is 8%.
|
|
Year 1
|
Year 2
|
|
Revenues
|
900
|
950
|
|
|
|
|
|
Operating expenses
|
300
|
470
|
|
(not depreciation)
|
|
|
|
Depreciation
|
125
|
120
|
|
Increase in Working Capital
|
20
|
20
|
|
Capital expenditures
|
75
|
95
|
|
Marginal corporate tax rate
|
40%
|
40%
|
[A] Calculate the incremental earnings for years 1 and 2
[B] Calculate the present value of the free cash flows of this project?
[C] Calculate the free cash flows for this project for the years 1 and 2