Question

Tetious Dimensions is introducing a new product and has an expected change in net operating income of $790,000. Tetious Dimensions has a 30 percent marginal tax rate. This project will also produce $190,000 of depreciation per year. In addition, this project will cause the following changes in year 1: Without the Project With the Project Accounts receivable $5,000 $84,000 Inventory 98,000 184,000 Accounts payable 75,000 117,000 What is the project's free cash flow in year 1? The free cash flow of the project in year 1 is $ 701000. (Round to the nearest dollar.)

Answer 1

$620,000

Step-by-step explanation:

to determine the net cash flow generated by the project, we can use the indirect method to determine cash flows:

net income = $790,000 x (1 - 30%) = $553,000

net income adjustments:

• depreciation expense $190,000
• increase in accounts payable $42,000
• increase in accounts receivable ($79,000)
• increase in inventory ($86,000)

Project's cash flow $620,000

Without the With the change

project project

Accounts receivable $5,000 $84,000 $79,000

Inventory $98,000 $184,000 $86,000

Accounts payable $75,000 $117,000 $42,000