Corporate Finance Questions and Answers

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T he Sisyphean Corporation

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.

The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.

Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.

I ncremental Earnings
F orecast
Y ear
Units
Sales (units × $18)
Cost of Good Sold (units × $9)
Gross Profit
Depreciation ($30,000 / 3)
EBIT
Income tax at 35%
Unlevered net income
Add back Depreciation
Cash Flows from Operations

1
2,000
36,000
18,000
18,000
10,000
8,000
2,800
5,200
10,000
15,200

2
2,200
39,600
19,800
19,800
10,000
9,800
3,430
6,370
10,000
16,370

3
2,420
43,560
21,780
21,780
10,000
11,780
4,123
7,657
10,000
17,657

N etworking Capital
F orecast
Y ear
1
2
3
Sales (units × $18)
36,000 39,600 43,560
Cash (2% of sales)
720
792
871.2
Accounts Receivable (4% of
sales)
1440
1584 1742.4
Inventory (9% of sales)
3240
3564 3920.4
Accounts Payable (5% of sales)
1800
1980
2178
NWC (Cash + Inventory+ AR AP)
3600
3960
4356
Change...
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