Question

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Brian runs a small corner store. Last year he had sales of $260,000. The cost of...

Brian runs a small corner store. Last year he had sales of $260,000. The cost of goods sold was $130,000 and depreciation was $40,000. He did not pay any interest. His taxation rate was 32.5%. His fixed (non-current) assets were valued at $250,000 at the beginning of the year. During the year he invested in some refrigeration equipment and now his fixed assets are valued at $270,000. His net working capital fell by $30,000 because Brian adopted a stricter inventory management process. How much free cash flow (FCF) has Brian's corner store generated for him this year?

Select one: a. $40,750 b. $100,500 c. $70,750 d. $32,077 e. $90,800

Solutions

Expert Solution

Solution: Value of Fixed Assets at the beginning of the year =  $250,000

Value of Fixed Assets at the end of the year = $270,000

Depreciation for the year = $40,000

Value of Fixed Assets at the end of the year = Value of Fixed Assets at the beginning of the year + Capital Expenditure during the year - Depreciation for the year

Capital Expenditure during the year (Capex) - Depreciation for the year = Value of Fixed Assets at the end of the year - Value of Fixed Assets at the beginning of the year

Hence, Capex - Depreciation = $270000 - $250000 = $20000

Capex - $40000 = $20000

Thus, Capex = $60000

Change in Working Capital Investment = -$30,000

Sales 260000
Costs of Goods Sold 130000
Gross Profit 130000
Depreciation 40000
Interest 0
Profit for Taxation 90000
Tax rate = 32.5%
Tax Expense 29250
Net Income $60750


Free Cash Flow (FCF) = Net Income + Depreciation + Interest*(1-tax%) - Capex - Working Capital Investment

= 60750 + 40000 + 0 - 60000 -(-30000)

= 60750 + 40000 - 60000 + 30000 = $70750

Option C is correct

jeff jeffy answered 2 months ago
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