Racin scooters is introducing a new product and has an expected change in EBIT o

Question

Racin scooters is introducing a new product and has an expected change in EBIT of $475,000. R.Scooters has a 34% marginal tax rate. This project will also produce $100,000 of depreciaion per year. In addition the project will also cause the following changes in year 1: Account receivable without the project: $45,000 With the Project: $63,000. Inventory without the project: 65, 000; With the project: 80,000 Accounts Payable without the project: 70,000; With the project: 94,000 What is the project's free cash flow for year 1?

Explanation / Answer

Particulars Amount EBIT 475000 Add:Depreciation 100000 EBIT before Depreciation 575000 Marginal Tax Rate 368000 Add:Accounts Receivable 15000 Add:Inventory 15000 Less:Accounts Payable -16000 Free Cash Flow for the First Year 382000

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