Question

​(Calculating changes in net operating working​ capital)  Duncan Motors is introducing a new product and has an expected change in net operating income of

​$305 comma 000305,000.

Duncan Motors has a

3030

percent marginal tax rate. This project will also produce

​$48 comma 00048,000

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

	Without the Project		With the Project
Accounts receivable	​$31 comma 00031,000		​$26 comma 00026,000
Inventory	29 comma 00029,000		35 comma 00035,000
Accounts payable	51 comma 00051,000		91 comma 00091,000

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 = ($26,000 - $31,000) + ($35,000 - $29,000) - ($91,000 - $51,000)

= -$5,000 + $6,000 - $40,000 = -$39,000

Capital Expenditure = Nil

Interest = Nil

Hence,

FCF = $305,000 + $48,000 - (-$39,000) = $ 392,000

• 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