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Chemtec is undertaking a project that will require an upfront investment today in net working capital, and plant and equipment (i.e., capital expenditures) of \$100$100 million and \$200$200 million, respectively. If there are no revenues or expenses expected until next year, what is the project's free cash flow today in millions of dollars?

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Answer:

-$300 million

Explanation:

Change in net working capital (CNWC) = $100 million

Capital Expenditures (CE) = $200 million

Assuming no depreciation expenses, the free cash flow (FCF) is given by:

[tex]FCF = EBIT*(1-tax) - CNEC - CE[/tex]

Since no revenues are expected until the next year, EBIT = 0.

[tex]FCF = - \$100 -\$200\\FCF = - \$300\ million[/tex]

The project's free cash flow today is -$300 million.

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