Question

​A- (Calculating changes in net operating working​ capital) A company is introducing a new product and has an expected change in net operating income of ​$790,000. The company has a 33% marginal tax rate. This project will also produce $210,000 of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:

	without the project	with the project
accounts receivable	$53000	$91000
inventory	$97000	$176000
accounts payable	$75000	$118000

the free cash flow of the project in year 1 is:

B- Duncan Motors is introducing a new product and has an expected change in net operating income of $310,000. Duncan Motors has a 30% marginal tax rate. This project will also produce $51,000 of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:

	without the project	with the project
accounts receivable	$37,000	$24,000
inventory	$29,000	$34,000
accounts payable	$54,000	$88,000

the free cash flow of the project in year one is :

Answer 1

Answer to A

First we will calculate the change in Working Capital:-

Change in Working Capital Computation
	With The expansion	Without the Expansion	Change
Accounts Receivable	91000	53000	38000
Inventory	176000	97000	79000
Accounts Payable	118000	75000	43000
Total	160000

Note - All Amounts are in $

Now, to get net free cash flow from Net operating income, we need to deduct depriciation, taxes and Net change in working Capital as computed above.

We need to again add back depriciation as it is non cash item.

The result would be our Net free cash flow of the project.

Net Increase in Operating Income (1)	790000
Less Depriciation (2)	210000
Pofit Before Tax (3)	580000
Tax = (4=3*33%)	191400
Pofit after Tax (5=3-4)	388600
Add:- Depriciation (2)	210000
less:- Change in Working Capital (6)	160000
Free Cash flow of the Project	438600

Note - All Amounts are in $