Question

(Calculating free cash flows) Racin' Scooters is introducing a new product and has an expected change in EBIT of $465,000. Racin' Scooters has a 31 percent marginal tax rate. The project will produce $110,000 of depreciation per year. In addition, the project will cause the following changes in year 1: 6. What is the project's free cash flow in year 1? The project's free cash flow in year 1 is $. (Round to the nearest dollar.) i Data Table Х WITHOUT THE PROJECT WITH THE PROJECT Accounts receivable $47,000 $60,000 Inventory 67,000 86,000 Accounts payable 80,000 91,000 (Click on the icon located on the top-right corner of the data table above in order to copy its contents into a spreadsheet.) Print Done

Answer 1

EBIT = $465,000
tax rate = 31%
Depreciation = $110,000

Increase in accounts receivable = $60,000 - $47,000 = $13,000

Increase in Inventory = $86,000 - $67,000 = $19,000

Increase in accounts payable = $91,000 - $80,000 = $11,000

Change in NWC = Increase in accounts receivable + Increase in Inventory - Increase in accounts payable
= $13,000 + $19,000 - $11,000
= $21,000

Free Cash Flow = EBIT x (1-Tax) + Depreciation - Capital spending - Change in NWC
= $465,000 x (1-0.31) + $110,000 - $0 - $21,000
= $320,850 + $110,000 - $21,000
= $409,850

Free Cash Flow in Year 1 = $409,850