Calculating changes in net operating working​ capital)  Duncan Motors is introducing a new product and has an expected change in net operating income of ​$300,000. Duncan Motors has a 34 percent marginal tax rate. This project will also produce ​$50,000 of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:                                 Without the Project     With the ProjectAccounts receivable $33,000                        $23,000Inventory                  $25,000                        $40,000Accounts payable     $50,000                        $86,000The free cash flow of the project in year 1 is ​$ (Round to the nearest​ dollar.)

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Asked Nov 11, 2019
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Calculating changes in net operating working​ capital)  

Duncan Motors is introducing a new product and has an expected change in net operating income of ​$300,000. Duncan Motors has a 34 percent marginal tax rate. This project will also produce ​$50,000 of depreciation per year. In​ addition, this project will cause the following changes in year​ 1:

                                 Without the Project     With the Project
Accounts receivable $33,000                        $23,000
Inventory                  $25,000                        $40,000
Accounts payable     $50,000                        $86,000

The free cash flow of the project in year 1 is ​$ 

(Round to the nearest​ dollar.)

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Expert Answer

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Step 1

Calculate the increase in net working capital as follows:

Increase in
Increase in
Increase in
net working capital
current liabilities
current assets
($23,000-$33,000) +
- [S86,000-$50,000
(S40,000-S25,000)
=[-S10,000+S15,000]-$36,000
=S5,000-S36,000
=$31,000
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Increase in Increase in Increase in net working capital current liabilities current assets ($23,000-$33,000) + - [S86,000-$50,000 (S40,000-S25,000) =[-S10,000+S15,000]-$36,000 =S5,000-S36,000 =$31,000

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Step 2

Calculate the free-cash ...

After-tax net operating profit +
Depreciation -
Free-cash flows =
CAPEX
Net working capital
=(S300,000 x (1-34%)) + $50, 000 - S0-(-S31000)
-S198,000+ $50,000-S0+$31,000
S279,000
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After-tax net operating profit + Depreciation - Free-cash flows = CAPEX Net working capital =(S300,000 x (1-34%)) + $50, 000 - S0-(-S31000) -S198,000+ $50,000-S0+$31,000 S279,000

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