Question

(Calculating changes in net working​ capital)  Duncan Motors is introducing a new product which it expects will increase its operating profit by ​$ 290,000. Duncan Motors has a 30 30​% marginal tax rate. This project will also produce ​$ 47,000 of depreciation per​ year, and will cause the following changes in year​ 1: Without the project With the project Accounts receivable ​$ 28,000 ​$27,000 Inventory 26,000 . 42,000 Accounts payable 49,000 84,000 What is the​ project's free cash flow in year​ 1?

The free cash flow of the project in year 1 is ​$ . ​ (Round to the nearest​ dollar.)

Answer 1

Duncan Motors is introducing a new product which it expects will increase its operating profit by ​$ 290,000. Duncan Motors has a 30 30​% marginal tax rate. This project will also produce ​$ 47,000 of depreciation per​ year, and will cause the following changes in year​ 1: Without the project With the project Accounts receivable ​$ 28,000 ​$27,000 Inventory 26,000 . 42,000 Accounts payable 49,000 84,000 What is the​ project's free cash flow in year​ 1?

The free cash flow of the project in year 1 is ​$

FCF = Net Income + Depreciation + Interest - Changes in working capital - capital expenditures

operating profit	290000
Less depreciation	47000
= Earning Before interest and Tax	243000
Less tax exp @30%	72900
Net income	170100
Add back depreciation	47000
Add decrease in net working capital	20000
FCF	237100

increase in net working capital

	Without project	With project	change
Accounts receivable	28000	27000	-1000
Inventory	26000	42000	+ 16000
Accounts payable	49000	84000	-35000
		NET change	-20000