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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.)

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jepessoa

Answer:

$620,000

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

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