After spending a year and $53,000, you finally have the design of your new product ready....
After spending a year and $53,000, you finally have the design of your new product ready. In order to start production, you will need $30,000 in raw materials and you will also need to use some existing equipment that you've fully depreciated, but which has a market value of $102,000. Your colleague notes that the new product could represent 10% of the company's overall sales and that 10% of overhead is $60,000. Your tax rate is 38%. As you start your analysis of the product, what should be your initial incremental free cash flow? The initial incremental free cash flow is?
(Round to the nearest dollar. Be sure to use a negative sign if the answer is negative.)
Homework Answers
Initial Incremental free cash flow = Cost of raw material + value after tax of existing equipment
= -30,000 - 102,000(1-38%)
= -$93,240
Note: 53,000 already spent is a sunk cost and not relevant
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