The Tasty Wholesale Bakery is considering opening a new warehouse/distribution c

Question

The Tasty Wholesale Bakery is considering opening a new warehouse/distribution center. It is expected that sales will be increasing and investment in inventory will decline due to the introduction of JIT inventory with the new warehouse/distribution center. Tasty expects the following in year 1:

EBIT will increase by $850,000

Working capital of $40,000 will be freed up for other uses

The new facility will be depreciated at a rate of $250,000 per year.

Tasty will have a 34% marginal tax rate.

REQUIRED:
What is the project’s free cash flow in year 1?

Explanation / Answer

EBIT $850,000 Less Tax 34% $289,000 ------------------------------- PAT $561,000 Add Back Dep $250,000 Add Back Wrk Cap $40,000 ---------------------------------- Net FCF $851,000

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