(Calculating free cash flows) Spartan Stores is expanding operations with the in

Question

(Calculating free cash flows) 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. While 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 depreciation per year and Spartan Stores is in the 34 percent marginal tax rate. What is the project

Explanation / Answer

Hi,

Please find the answer as follows:

Change in WC = (90000 - 70000) + (80000-110000) + (80000-65000) = 5000

Freee Cash Flow = 900000*(1-.34) + 300000 - 5000 = 889000

Thanks.

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