Problem:
Visible Fences is introducing a new product and has an expected change in EBIT of $900,000. Visible Fences has a 34% marginal tax rate. This project will also produce $ 300,000 of depreciation per year. In addition, in year 1 this project will also cause the following changes:
Without the Project With the project
Accounts Receivable $ 55,000 $ 63,000
Inventory 55,000 70,000
Accounts Payable 90,000 106,000
What is the project's free cash flow in year 1?
Template to solve the problem:
A project's free cash flows =
Change in earnings before interest and taxes
- change in taxes
+ change in depreciation
- change in net working capital
- change in capital spending