Universit Ca Foscari di Venezia Finanza Aziendale Campus di Treviso Secondo periodo: Novembre-Dicembre 2015

FINANZA AZIENDALE Prof. Guido Max Mantovani - Prof. Giulia Baschieri

FREE CASH FLOW COMPUTATION

EXERCISES & SOLUTIONS

Exercise 1 Consider a firm that wants to expand its own productivity by buying a new (huge) machine. The new machine costs $100m and generates returns in the first year equal to $90m growing at 10% for the following 4 years. Machine will be depreciated with straight-line depreciation during its 5 years expected life. The machine will have fixed costs equal to $30m per year, and variable costs equal to the 13% of sales. Current working capital equals $13m in year 1, growing at 10% up to year 5. Furthermore, it is expected to be entirely recovered in year 6. Considering a tax rate equal to 40%, define the project cash flows. Solution

Year 0 1 2 3 4 5 6

+ Sales 90 99 108.9 119.79 131.77 - Fixed Costs 30 30 30 30 30

- Variable Costs 11.70 12.87 14.16 15.57 17.13

EBITDA 48.30 56.13 64.74 74.22 84.64 - Depreciation 20 20 20 20 20

EBIT 28.30 36.13 44.74 54.22 64.64 - Taxes 11.32 14.45 17.90 21.69 25.86

NOPAT 16.98 21.68 26.85 32.53 38.78 + Depreciation 20 20 20 20 20

CWC 13.00 14.30 15.73 17.30 19.03 + CWC -13 -1.30 -1.43 -1.57 -1.73 19.03

- CAPEX 100 FCFF -100.00 23.98 40.38 45.42 50.96 57.05 19.03

Exercise 2 Rionero Ltd is a privately held company based in UK. Rionero develops and produces water bottles. The firm management wants to exploit expected growth in orange juice sector by opening a new plant in Sicily for both producing water and juices with local oranges. Hereafter, Rionero forecasted Income Statement (P&L) and Balance Sheet (BS) for years 2016-2020 are reported. P&L ( Mln) 2015 2016E 2017E 2018E 2019E 2020E

Revenues 55.000 56.100 58.344 72.930 91.163 113.953 Operating Costs 46.750 47.685 49.592 61.991 77.488 96.860 operating costs/revs 0.850 0.850 0.850 0.850 0.850 0.850

EBITDA 8.250 8.415 8.752 10.940 13.674 17.093

Universit Ca Foscari di Venezia Finanza Aziendale Campus di Treviso Secondo periodo: Novembre-Dicembre 2015

ebitda/revs 0.150 0.150 0.150 0.150 0.150 0.150 Amortization 3.000 3.063 4.063 5.063 5.188 2.313 EBIT 5.250 5.353 4.689 5.877 8.487 14.780

ebit/revs 0.096 0.095 0.080 0.081 0.093 0.130 Interest Expenses 0.600 0.663 0.768 0.888 1.024 1.178 EBT 4.650 4.690 3.921 4.989 7.463 13.602 Taxes -1.535 -1.548 -1.294 -1.646 -2.463 -4.489 NetIncome 3.116 3.142 2.627 3.343 5.000 9.113

BS ( Mln) 2015 2016E 2017E 2018E 2019E 2020E PCA 15.000 12.563 18.500 23.438 19.500 18.438 Receivables 13.000 13.260 13.790 20.686 25.858 32.321 Inventory 12.500 12.900 13.650 16.965 20.963 25.594 Payables 7.200 7.430 7.863 9.772 12.075 14.742 Cash 2.000 2.500 2.500 2.500 2.500 2.500 Bank Debt LT -5.000 -5.500 -6.050 -6.655 -7.321 -8.053 Loans -7.000 -8.050 -9.258 -10.646 -12.243 -14.080 NFP 10.000 11.050 12.808 14.801 17.064 19.633 Equity 23.300 20.242 25.270 36.515 37.182 41.978

Determine Rionero future cash flows at January, 1 2016. Solution To find the firm future cash flows, we have to solve the following:

Year 2015 2016E 2017E 2018E 2019E 2020E

T 0 1 2 3 4 5

Revenues 55.000 56.100 58.344 72.930 91.163 113.953 - Operating Costs 46.75 47.685 49.592 61.991 77.488 96.86

= EBITDA 8.250 8.415 8.752 10.939 13.675 17.093

- Amortization 3.000 3.063 4.063 5.063 5.188 2.313

= EBIT 5.250 5.352 4.689 5.876 8.487 14.780 - Taxes 1.733 1.766 1.547 1.939 2.801 4.877

= NOPAT 3.518 3.586 3.142 3.937 5.686 9.903

+ Amortization 3.000 3.063 4.063 5.063 5.188 2.313

+ Receivables 13.000 13.260 13.790 20.686 25.858 32.321

+ Inventory 12.500 12.900 13.650 16.965 20.963 25.594

- Payables 7.200 7.430 7.863 9.772 12.075 14.742 CWC = Receivables + Inventory - Payables 18.300 18.730 19.577 27.879 34.746 43.173

- CWC 0.430 0.847 8.302 6.867 8.427

PCA = Permanent Capital Assets 15.000 12.563 18.500 23.438 19.500 18.438

- CAPEX = PCAt + Amortizationt - PCAt-1 0.626 10.000 10.001 1.250 1.251

= FCFF = NOPAT + Amortization NWC - CAPEX 6.518 5.593 -3.642 -9.303 2.757 2.538

depreciation

depreciation

+

Universit Ca Foscari di Venezia Finanza Aziendale Campus di Treviso Secondo periodo: Novembre-Dicembre 2015 Exercise 3 Lilia plc expects credit sales for 12m in the next year and has budgeted production costs as follows: m Raw materials 7 Direct labour 3 Production overheads 4 Total production costs 14

Raw materials are in inventory for an average of two weeks while finished goods are in inventory for an average of three weeks. All raw materials are added at the start of the production cycle, which takes four weeks and incurs labour costs and production overheads at a constant rate. Raw materials suppliers allow two weeks credit while customers are given nine weeks to pay. Consider work-in-progress as finished for the 30%. If production takes place evenly throughout the year, what is the total working capital requirement? Suggested answer We have to consider production costs and the time of inventory. We can build the following table:

Raw materials 7m*(2/52) = 269,230 Work-in-progress Raw materials 7m*(4/52) = 538,462 + Labour costs 3m*(4/52)*0.3 = 69,230 + Overheads 4m*(4/52)*0.3 = 92,307 = 699,999 Finished goods 14m*(3/52) = 807,962 Trade receivables 12m*(9/52) = 2,076,923 Trade payables 7m*(2/52) = (269,231) Working capital required 3,584,883

CCC = (2+3+4) + 9 2 = 16 weeks