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Problem 9-10 You are evaluating a new product. In year 3 of your​ analysis, you are...

Problem 9-10

You are evaluating a new product. In year 3 of your​ analysis, you are projecting pro forma sales of ​$5 million and cost of goods sold of ​$3 million. You will be depreciating a ​$1 million machine for 5 years using​ straight-line depreciation. Your tax rate is 35​%. ​Finally, you expect working capital to increase from $200,000 in year 2 to ​$300,000 in year 3. What are your pro forma earnings for year​ 3? What are your pro forma free cash flows for year​ 3?

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Answer #1

Calculation of earnings:

Sales = $5,000,000

Less: cost of goods sold = $3,000,000

Depreciation 1,000,000/5 = 200,000

Income before tax = $1,800,000

Less: Tax = $630,000

Net Income = $1,170,000

Free cash flow = Net income + depreciation - Investment in working capital

= 1,170,000+200,000 - 100,000

= $1,270,000

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