?(Calculating changes in net operating working? capital) Duncan Motors is introd
ID: 1172641 • Letter: #
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 ?$320,000 . Duncan Motors has a 32 percent marginal tax rate. This project will also produce ?$53,000 of depreciation per year. In? addition, this project will cause the following changes in year? 1:
What is the? project's free cash flow in year? 1?
The free cash flow of the project in year 1 is ?$___.(Round to the nearest? dollar.)
Without the Project With the Project Accounts receivable $34,000 $27,000 Inventory 30,000 44,000 Accountns payable 51,000 81,000Explanation / Answer
Free cash flow of the project in year 1 is= $247,600
Free cash flow = Net Operating Cash Flow +/(-) Net Changes in Working Capital
Net Operating Cash Flow = Net Operating Income [ 1 – Tax Rate ] + Depreciation Add Back
= $320,000 [ 1 – 0.32 ] + 53,000
= $217,600 + 53,000
= $ 270,600
Working Capital - Without the Project = Accounts receivable + Inventory + Accounts Payable
= $34,000 + 30,000 + 51,000
= $13,000
Working Capital - With the Project = Accounts receivable + Inventory + Accounts Payable
= $27,000 + 44,000 – 81,000
= - $10,000 [ Negative ]
Net Changes in Working Capital = $13,000 – [ -$10,000 ] = $23,000
Therefore, Free Cash Flow = $ 270,600 – 23,000 = $247,600
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