To calculate the free cash flows (FCFs) for this project, we need to follow the steps and formula for each year. The general formula for Free Cash Flow is:

$\text{FCF} = \text{Unlevered Net Income} + \text{Depreciation} - \text{Capital Expenditures} - \text{Increase in Net Working Capital}$

Step 1: Calculate Unlevered Net Income

$\text{Unlevered Net Income} = \text{(Revenues - Operating Expenses - Depreciation)} \times (1 - \text{Tax Rate})$

Year 1:

• Revenues: 128.5 million
• Operating Expenses (excluding depreciation): 37.9 million
• Depreciation: 20.5 million
• Tax rate: 30%

$\text{Unlevered Net Income (Year 1)} = (128.5 - 37.9 - 20.5) \times (1 - 0.30)$ $= 70.1 \times 0.70 = 49.07 \text{ million}$

Year 2:

• Revenues: 153.7 million
• Operating Expenses (excluding depreciation): 52.3 million
• Depreciation: 36.1 million

$\text{Unlevered Net Income (Year 2)} = (153.7 - 52.3 - 36.1) \times (1 - 0.30)$ $= 65.3 \times 0.70 = 45.71 \text{ million}$

Step 2: Add Back Depreciation

• Year 1: Depreciation = 20.5 million
• Year 2: Depreciation = 36.1 million

Step 3: Subtract Capital Expenditures

• Year 1: Capital Expenditures = 28.5 million
• Year 2: Capital Expenditures = 36.5 million

Step 4: Subtract Increase in Net Working Capital

• Year 1: Increase in Net Working Capital = 2.4 million
• Year 2: Increase in Net Working Capital = 8.6 million

Step 5: Calculate Free Cash Flows

Now we can calculate the Free Cash Flows using the formula for each year.

Year 1:

$\text{FCF (Year 1)} = 49.07 + 20.5 - 28.5 - 2.4$ $\text{FCF (Year 1)} = 38.67 \text{ million}$

Year 2:

$\text{FCF (Year 2)} = 45.71 + 36.1 - 36.5 - 8.6$ $\text{FCF (Year 2)} = 36.71 \text{ million}$

Final Free Cash Flows:

• Year 1: $38.7 million (rounded to 1 decimal place)
• Year 2: $36.7 million (rounded to 1 decimal place)

Would you like more details or have any further questions?

Related Questions:

1. How do changes in net working capital affect free cash flows?
2. What is the significance of unlevered net income in cash flow analysis?
3. How does capital expenditure impact a project’s cash flows over time?
4. What is the difference between levered and unlevered cash flows?
5. How do tax rates influence the overall cash flows of a project?

Tip:

Free Cash Flow is crucial for assessing the value and health of a project or company because it represents the cash available for distribution to investors after accounting for necessary capital investments.