Calculate the free cash flows of this project​ below:  ​(Round to one decimal​ place.)

**Incremental Free Cash Flows (millions)**
 
**Year 1**
 
**Year 2**

Unlevered Net Income

$
 
$
 
Add Back Depreciation
 
 
 
Capital Expenditures
 
 
Subtract Changes in Net Working Capital
 
 
 
 
**Free Cash Flows**

**$**
**** 
**$**

**** Year	1	2

Revenues	128.5	153.7

Operating Expenses (other than depreciation)	37.9	52.3

Depreciation	20.5	36.1

Increase in Net Working Capital	2.4	8.6

Capital Expenditures	28.5	36.5

Marginal Corporate Tax Rate (%)	30	30

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.

Calculate the free cash flows of this project below: (Round to one decimal place.)

Incremental Free Cash Flows (millions)

Year 1

Year 2

Unlevered Net Income

$

$

Add Back Depreciation



Capital Expenditures


Subtract Changes in Net Working Capital



Free Cash Flows

$

$

Year 1: 128.5 million in revenues, 37.9 million operating expenses, 20.5 million depreciation, 2.4 million increase in net working capital, 28.5 million capital expenditures, 30% marginal corporate tax rate.

Year 2: 153.7 million in revenues, 52.3 million operating expenses, 36.1 million depreciation, 8.6 million increase in net working capital, 36.5 million capital expenditures, 30% marginal corporate tax rate.

Learn how to calculate free cash flows for a project based on revenue, operating expenses, depreciation, capital expenditures, and changes in net working capital. This example covers Year 1 and Year 2 cash flow calculations with a 30% tax rate, making it suitable for finance students and professionals.

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