Reference no: EM132653318

Following is the five-year forecast for Skaggs KS Manufacturing: (all amounts in $millions)

	2020	2021	2022	2023	2024
EBIT	$4500	$4600	$4800	$6010	$8800
Capital Expenditures (Capex)	$500	$800	$700	$600	$500
Changes in Working Capital	$40	$100	$140	$100	$10
Depreciation	$50	$80	$100	$120	$150

Assuming a tax rate (t) of 21%, calculate Skaggs KS free cash flow for each year. Interest expenses are zero.

Assume a 10% discount rate.

NVP (2020 -2024) = (insert answer in Question 1 Below)

ASSUME THAT 2020 is Year 1, NOT YEAR 0. ITS A 5 YEAR FORECAST.

Question 1: Calculate the Total Net Present Value of the Five Year Cash Forecast for Skaggs KS Manufacturing. Choose best answer from the list below. All answers are in $millions.

HINT: To correctly answer this problem it's important that you use the free cash flow equation that approximates a firm's annual cash flow. The equation is: FCF = EBIT (1-t) - capital expenditures (capex) + depreciation +/- change in working capital. EBIT is earnings before interest and taxes. You apply this formula to each year in the problem then discount the results for each year back to the present to get the NPV. Note that you subtract working capital if working capital increases during the year and you add working capital if working capital decreases during the year. This is the same logic that used in applying the indirect method to determining a cash flow statement. So lets say the change in working capital is (30). This indicates that working capital decreased during the year so you add it in the free cash flow formula. If working capital increased by 30 then you would subtract it.

Depending upon the number of significant digits you round to your answer may be slightly different from any of the choices below. The correct answer below was determined using MS Excel.

Group of answer choices

[A] $15,193

[B] $14,345

[C] $19,367

[D] $11,278

[E] $14,942