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​(Calculating free cash flows​) Spartan Stores is expanding operations with the introduction of a new distribution...

​(Calculating free cash flows​) Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new distribution​ center, Spartan expects a change in EBIT of ​$940 comma 000. Although inventory is expected to drop from ​$85 comma 000 to ​$68 comma 000​, accounts receivables are expected to climb as a result of increased credit sales from ​$90 comma 000 to ​$150 comma 000. In​ addition, accounts payable are expected to increase from ​$70 comma 000 to ​$83 comma 000. This project will also produce ​$400 comma 000 of bonus depreciation in year 1 and Spartan Stores is in the 32 percent marginal tax rate. What is the​ project's free cash flow in year​ 1?

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Answer #1

Following is the formula for FCFF :-

FCFF = EBIT * (1 - tax rate) + Depreciation - Fixed Capital Investment - Working Capital Investment

Free Cash Flow in Year 1 = 1,009,200

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