A new distribution center is being built for a Petco. This project will help inc

Question

A new distribution center is being built for a Petco.  This project will help increase sales but their investment in their inventory will decline because of reduced logistics allowing them to move inventory to their showrooms quicker.  As a result the global company, Petco,  expects a change in EBIT of $900,000.  Inventories will be reduced from 490,000 to $70,000.  Accounts receivable will increase due to increased credit sales from $80,000 to $110,000.  Accounts payable will increase from $65,000 to $80,000.  There will be $300,000 of depreciation each year.  The global company has a 34 percent marginal tax rate.  What is the project's free cash flow in the first year?

Explanation / Answer

Hi,

Please find the answer as follows:

Thanks.

EBIT
90000 Less Taxes
30600 Profit After Tax
59400 Add Depreciation
300000 Less Changes in Working Capital

Add Decrease in Inventory -420000
Increase in Accounts Payable -15000
Less Increase in Accounts Receivable 30000
Total Change in Working Capital
405000 Free Cash Flow
764400

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