Question 2t The General Motors Corporation is introducing a new product and whic

Question

Question 2t

The General Motors Corporation is introducing a new product and which is expected to result in change in EBIT or $700,000. The firm has a 34 percent marginal tax rate. This product will also produce $200,000 of depreciation per year. In addition, this product will cause the following changes:

Balance Sheet Account

Without the product

with the product

Accounts receivables

$60,000

$95,000

Inventory

55,000

165,000

Accounts payable

45,000

70,000

Calculate the change in net working capital?

Calculate the product’s change in taxes.

What is the product’s free cash flow?

Balance Sheet Account

Without the product

with the product

Accounts receivables

$60,000

$95,000

Inventory

55,000

165,000

Accounts payable

45,000

70,000

Explanation / Answer

a) Without the product with the product Accounts receivables $60,000 $95,000 Inventory 55000 165000 Total Current Assets (a) $115,000 $260,000 Current Liabilities (b) Accounts payable 45000 70000 Working Capital = a - b $70,000 $190,000 Change in Working Capital ($190,000 - $70,000) $120,000 b) Product’s change in taxes = Change in EBIT x Tax Rate = $700,000 x 34% $238,000 c) Free cash Flow FCF = EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure) FCF = $700,000 x (1-34%) + 200,000 - $120000 - 0 $542,000

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