Question
Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due
Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new distribution center, Spartan expects a change in EBIT of $900,000.
Although inventory is expected to drop from $90,000 to $70,000, accounts receivables are expected to climb as a result of increased credit sales from $80,000 to $110,000. In addition, accounts payable are expected to increase from $65,000 to $80,000. This project will also produce $300,000 of bonus depreciation in year 1 and Spartan Stores is in the 21 percent marginal tax rate. What is the project's free cash flow in year 1?
(Calculating operating cash flows)
Assume that a new project will annually generate revenues of $2,000,000 for the next 3 years. Cash expenses including both fixed and variable costs will be $800,000 per year, bonus depreciation will be $1,500,000 n year 1, and the firm has enough income in other areas to offset any tax losses that might occur in year 1. In addition, let's assume that the firm's marginal tax rate is 21 percent. Calculate the operating cash flows in years 1 through 3.
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