Slattery Industries reported the following financial information for 20X2:
|
Revenues
|
$10.0 million
|
|
Costs & expenses (excluding depreciation)
|
8.0
|
|
Depreciation
|
0.5
|
|
Taxes
|
0.6
|
|
Net income
|
0.9
|
|
Fixed assets (gross)
|
10.0
|
|
Working capital
|
4.0
|
The firm expects revenues costs, expenses (excluding depreciation), and working capital to grow at 10% per year for the next three years. It also expects to invest $2 million per year in fixed assets which includes replacing worn out equipment and purchasing enough new equipment to support the projected growth and maintain a competitive position. Assume depreciation is 5% of the gross fixed asset account, the tax rate is 40%, and that Slattery has no debt and therefore pays no interest.
a. Make a rough projection of cash flows for 20X3, 20X4, and 20X5 assuming no new debt or equity is raised. Simply compute an income statement in each year, add depreciation, and subtract increases in working capital and fixed asset purchases.
b. Are your projections free cash flows?
c. What do your projections imply for Slattery's owners/managers?
d. How would you evaluate Slattery's ability to achieve this level of growth (as measured by the increase in fixed assets)?