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Free cash flow

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1) 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

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Solution Preview

Change in earnings before interest and taxes = 900,000
Change in taxes = 900,000X0.34=306,000
Depeciation = 300,000
Working Capital = Receivables + ...

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The solution explains how to calculate the free cash flow

See Also This Related BrainMass Solution

Dell analysis of cash provided by operating activities, fred cash flow, dividends

See attached files.

Case 7-1
Analysis of Cash Flows

Refer to the annual report of Dell in Appendix A:

a. Explain how the following items create differences between Dell's earnings from continuing operations and its net cash provided by operating activities:
(1) Depreciation and amortization
(2) Change in deferred taxes
(3) Decrease in receivables
(4) Decrease in inventories
b. Explain why net income is much less than cash from operations in 2005.
c. Calculate Dell's free cash flows for each of the past three years.
d. How has Dell used its free cash flows during the past three years?
e. How much cash has Dell returned to shareholders during each of the past three years and in total?

ANSWER CHECK: (c) 2005=$4,785

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