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Free cash flow

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 + ...

Solution Summary

The solution explains how to calculate the free cash flow