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 36 percent marginal tax rate. This project will also produce $210,000 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 $56,000 103,000 69,000 $95,000 184,000 124,000 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 Operating Income	765,000
Less: Tax	275,400
Income after tax	489,600
Add: Depreciation	210,000
Less: increase in working capital	65,000
Free cash flow	634,600
Working capital = current assets - Current Liabilities
	Without	With
Working capital	90000	155000

1 Change in Operating Income 2 Less: Tax 3 Income after tax 4 Add: Depreciation 5 Less: increase in working capital 6 Free cash flow B 765000 =B1*36% =B1-B2 210000 =C10-B10 =B3+B4-B5 8 Working capital = current assets - Current Liabilities 9 10 Working capital Without With |=103000+56000-69000 =95000+184000-124000 ||