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 $760,000. Tetious Dimensions has a 31 percent marginal tax rate. This project will also produce $190,000 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 69,000 $88,000 177,000 117,000 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

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

DE Net Operating income before tax Tax(31%) NOPAT $760,000 $235,600 $524,400 Depreciation $190,000 Operating Cash Flow Investment in NWC (Cash Outflow) Free Cash Flow of the Project in year 1 $714,400 $62,000 $652,400 Acconts receivable Inventory Accounts payable Net Working Capital (NWC) Without the Project $54,000 $101,000 $69,000 $86,000 with the Project $88,000 $177,000 $117,000 $ 148,000

Cell reference -

A Net Operating income before tax Tax(31%) NOPAT 760000 =C2*0.31 =C2-C3 von Awn- Depreciation 190000 Operating Cash Flow Investment in NWC (Cash Outflow) Free Cash Flow of the Project in year 1 =C4+C6 =D17-C17 =C8-C9 w = 3 14 Acconts receivable Inventory Accounts payable Net Working Capital (NWC) Without the Project 54000 101000 69000 =C14+C15-C16 With the Project 88000 177000 117000 =D14+D15-D16 16 18 19

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