Question

Project X will require ABC Corp. to purchase equipment at time zero equal to	$4,000
Inventory will increase by	$200
Accounts payable will rise by	$35
All other working capital components will stay the same	$0
Change in operating networking capital is	$165
Dollar value of sales in year one	$17,000
Dollar value of sales in year two	$18,000
Dollar value of sales in year three	$19,000
Dollar value of sales in year four	$20,000
The fixed cost of producing the product in year 1	$1,169
The fixed cost of producing the product in year 2	$1,169
The fixed cost of producing the product in year 3	$1,169
The fixed cost of producing the product in year 4	$1,169
The variable cost of producing the product in year one is	$11,900
The variable cost of producing the product in year two is	$12,600
The variable cost of producing the product in year three is	$13,300
The variable cost of producing the product in year four is	$14,000
The accelerated depreciation in year one is	$1,320
The accelerated depreciation in year two is	$1,800
The accelerated depreciation in year three is	$600
The accelerated depreciation in year four is	$280
Salvage value on the equipment in year four is	$50
The amount of net operating working capital recovered in year four is	$75
The estimated tax rate is	28%
WACC =	5%

Given the information in the table, what is the Free Cash-flow in year 3?

$3,430

$3,535

$3230

$3,630

Answer 1

The correct answer of free cash flow is $3430 .The working is shown below.

Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=5%=0.05 N=Year of Cash Flow N Year 3 A Purchase of equipment B Sales $19,000 C Variable Costs ($13,300) D Fixed Costs ($1,169) E=B+C+D Profit before depreciation (Before tax) $4,531 F Depreciation expense $600 G Profit after depreciation and before tax $3,931 H=G*(1-0.28) After tax profit and depreciation $2,830 I=F Depreciation expense $600 J=H+I Free Cash Flow -After tax profit and depreciation + depreciation $3,430