Operating cashflow

Question

The new drug is expected to be a block-buster, which will help to increase the company’s marketshare and the sales are expected to be $18 million in the first year. The sales revenue generated from this product alone is expected to grow at a rate of 9% pa in second, third, and fourth years and stay in line with inflation thereafter until its patent expires in 10 years.

Required equipment costing $8 million is expected to have a salvage value of $200,000 after 10 years. Fixed costs are estimated to be $3.50 million per year while variable production costs are expected to be equal to 20% of sales revenue in each case. To get the project underway, additional inventory of $450,000 would be required. The company would also need to increase its accounts payable by $100,000 and its accounts receivable by $150,000.

The weighted average cost of capital is calculated to be 11.5%. The current inflation of 1.5% pa isexpected to remain stable over the next 15 years, and so is the company’s tax rate of 30%.

Question: Calculation of initial cash outlay, operating cashflows per year and terminal cashflows

Answer 1

Iinitial Cash outlay is $8.45 million.

OCF =net income + non cash expenses + change in net working capital

Terminal Cash Flow is net cash flow that occurred at end of the project, after-tax proceeds from disposal of projects assets and (+/-) Change in working capital.