Question

(Related to Checkpoint 12.1) (Calculating changes in net operating working capital) Tetious Dimensions is introducing a new product and has an expected change in net operating income of $765,000. Tetious Dimensions has a 30 percent marginal tax rate. This project will also produce $220,000 of depreciation per year. In addition, this project will cause the following changes in year 1: Without the Project With the Project Accounts receivable Inventory Accounts payable $54,000 101,000 67,000 $85,000 184,000 115,000 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

Change in net operating working capital = Change in Accounts Receivable + Change in Inventory - Change in Accounts Payable

= [$85,000 - $54,000] + [$184,000 - $101,000] - [$115,000 - $67,000]

= $31,000 + $83,000 - $48,000 = $66,000

FCF = [Change in net operating income * (1 - t)] + Depreciation - Change in net operating working capital

= [$765,000 * (1 - 0.30)] + $220,000 - $66,000

= $535,500 + $154,000 = $689,500