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

​$755 comma 000755,000.

Tetious Dimensions has a

3131

percent marginal tax rate. This project will also produce

​$205 comma 000205,000

of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:

	Without the Project		With the Project
Accounts receivable	​$58 comma 00058,000		​$86 comma 00086,000
Inventory	97 comma 00097,000		176 comma 000176,000
Accounts payable	67 comma 00067,000		115 comma 000115,000

What is the​ project's free cash flow in year​ 1?

The free cash flow of the project in year 1 is

​$nothing .

​ (Round to the nearest​ dollar.)

Answer 1

FCF = Net Income + Depreciation + Interest - Changes in working capital - capital expenditures.

Change in working capital = ($86,000 - $58,000) + ($176,000 - $97,000) - ($115,000 - $67,000)

= $28,000 + $79,000 - $48,000 = $59,000

Capital Expenditure = Nil

Interest = Nil

Hence,

FCF = $755,000 + $205,000 - $59,000 = $ 901,000

• Taxes are not considered since net operating income is given which is after tax. If before tax profit would have been given then we would deduct taxes from it to find the FCF