Mygear has operated an online retail store selling off-road truck parts. As the name implies, the firm specialises in parts for the venerable Toyota JC50, which is known throughout the world for its durability and off-road prowess. The fact that Toyota stopped building and exporting the JC50 to the Australian market in 1992 meant that JC50 owners depended more and more on re-manufactured parts to keep their beloved off-road engine replacement requires mating the new engine with the Toyota drive train. Mygear owners had been offering engine adaptor kits for some time but have recently decided to begin building their own units. To make the adaptor kits the firm would need to invest in a variety of machine tools costing a total of $80,000. Mygear management estimates that they will be able to borrow $32,000 from the firm's bank at an annual interest rate of 8%. The remaining funds would have to be supplied by Mygear owners. The firm estimates that they will be able to sell 100 units a year for $1,450 each. The units would cost $1.000 each in cash expenses to produce (this does not include depreciation expense of $8,000 per year or interest expense of $2,560). After all expenses, the firm expects earnings before interest and taxes of $37,000. The firm has a marginal tax rate of 30% and the expected life of the equipment is 10-years. What is the annual free cash flow Mygear should expect to receive from the investment in year 1 assuming that it does not require any other investments in either capital equipment or working capital and the equipment is depreciated over a 10-year life to a zero salvage and book value? Mygear has operated an online retail store selling off-road truck parts. As the name implies, the firm specialises in parts for the venerable Toyota JC50, which is known throughout the world for its durability and off-road prowess. The fact that Toyota stopped building and exporting the JC50 to the Australian market in 1992 meant that JC50 owners depended more and more on re-manufactured parts to keep their beloved off-road engine replacement requires mating the new engine with the Toyota drive train. Mygear owners had been offering engine adaptor kits for some time but have recently decided to begin building their own units. To make the adaptor kits the firm would need to invest in a variety of machine tools costing a total of $80,000. Mygear management estimates that they will be able to borrow $32,000 from the firm's bank at an annual interest rate of 8%. The remaining funds would have to be supplied by Mygear owners. The firm estimates that they will be able to sell 100 units a year for $1,450 each. The units would cost $1.000 each in cash expenses to produce (this does not include depreciation expense of $8,000 per year or interest expense of $2,560). After all expenses, the firm expects earnings before interest and taxes of $37,000. The firm has a marginal tax rate of 30% and the expected life of the equipment is 10-years. What is the annual free cash flow Mygear should expect to receive from the investment in year 1 assuming that it does not require any other investments in either capital equipment or working capital and the equipment is depreciated over a 10-year life to a zero salvage and book value
