Answered: hat is the value of 'FREE CASH FLOW' in…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Maram & Company are manufacturers of furniture. They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, and the resultant revenue and costs will start immediately. In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be discontinued. There is a fixed cost of Rs. 2 million each year and the variable cost of production comes to 60% of sales revenue. Depreciation is straight line over the 5 year period. The value of plant and machinery at the end of 5 years can be assumed to be zero. Maram will have to invest in working capital equal to 20% of sales revenue at the beginning of each year. You may assume that the entire working capital investment is recovered at the end of the project. The applicable tax rate for Maram is 33%. Maram has a Weighted Average Cost of Capital of 10%. (Assume that all cash flows occur at the end of each year for convenience.) Q.What is the value of 'FREE CASH FLOW' in the year 2021? A.Rs. 1.23 million B.Rs. 2.95 million C.Rs. 3.95 million D.Rs. 5.04 million

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