Question

(Calculating changes in net operating working​ capital)  Duncan Motors is introducing a new product and has an expected change in net operating income of $280,000. Duncan Motors has a 30 percent marginal tax rate. This project will also produce $48,000 of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:

	Without the Project		With the Project
Accounts receivable	​$34 comma 00034,000		​$19 comma 00019,000
Inventory	28 comma 00028,000		42 comma 00042,000
Accounts payable	49 comma 00049,000		89 comma 00089,000

What is the​ project's free cash flow in year​ 1?

The free cash flow of the project in year 1 is ​$nothing. (Round to the nearest​ dollar.)

Answer 1

Free cash flow from the project will be calculated as follows:

Net operating income = $280,000

Less:Taxes @30% = $84,000

Earnings after Tax = $196,000

Add: Depreciation(non-cash expense) = $48,000

Add: Decrease in Accounts Receivables (cash release) = 15,000

Less: Increase in Inventory (cash block) = $14,000

Add: Increase in Accounts Payable (cash not paid) = $40,000

Free cash flow = $285,000