Problem:

ABC company just completed a business strategy for the next 5 years that is planned to result in increasing sales growth and slightly improve its operating margin. (Note: the operating margin includes depreciation expense). This business plan will require reinvestment of NOPAT to grow the business and will require incremental working capital and net fixed capital investments of 25% of NOPAT.

Prior year sales were 600M and are planned to grow by 5% in the first year followed by 6% and 7% in the next two years. In years 4 and 5 of the forecast period sales are expected to level off to a 6% growth rate after that. Improvements in operating costs are expected to improve the operating margin to 10% in year 1, increasing to 11% in the second year and to 12% in year 3. However, competitive pressures and increased costs are expected to shrink margins to 11% in years 4 and 5.

Taxes will remain at 40% and the WACC for ABC company is 12%.

Required:

Question 1: Determine the FCF (Free Cash Flow) for the 5 year forecast period.

Question 2: Determine the present value of this 5 year forecast period.

Note: Please show how to work it out.