A firm considers to buy a machine in 2020. The cost of that machine is $ 5 000 000. The firm uses 5 year straight line depreciation which allows it to write off $ 1 000 000 depreciation expense each year. The firm is subject to 20% corporate tax rate. The firm's revenue in 2021 is expected to be $ 6 000 000 if the investment is not done. The revenue will be $ 9 000 000 if the investment is done. The firm's total costs (including both COGS and General&Administrative Costs) will be $ 4 000 000 if the investment is not done. The total costs will be $ 5 500 000 if the investment is done. Also the following information is given for the year 2021 Without Investment With Investment
Inventories $ 300 000 $ 500 000
Acc. Receivables $ 200 000 $ 300 000
Acc. Payables $ 100 000 $ 150 000
Given the above information, calculate the free cash flow of that investment for the years 2020 and 2021.

Answer and Explanation:

The computation of the free cash flow of the investment for the year 2020 and 2021 is shown below:

Particulars                       Case 1                     Case 2

                              Without Investment      With Investment

Add: Earnings Before

Interest and

Tax × (1 - Tax Rate)          $2,000,000          $2,500,000

Add: Non Cash Expenses$0                     $1,000,000

less: Change in

(Current Assets

- Current Liabilities)    ($400,000)         ($650,000)

Less: Capital Expenditure $0                  ($5,000,000)

Free Cash Flows               $1,600,000($2,150,000)

Working notes:

1.

Particulars                          Without InvestmentWith Investment

Revenue for the Year 2021     $6,000,000          $9,000,000

Less: Cost of Goods Sold     $4,000,000           $5,500,000

(-) Depreciation                      $0                                 $1,000,000

Earnings Before

Interest and Tax                         $2,000,000                $2,500,000

Tax Savings on Depreciation

(Depreciation × 20%)                  $0                               $200,000

2.

Current Assets               Without Investment          With Investment

Inventories                        $300,000                         $500,000

Accounts Receivable       $200,000                          $300,000

Total                                  $500,000                          $800,000

(Less: Current Liabilities)  

Accounts Payable               $100,000                       $150,000

Less: Change in

(Current Assets

- Current Liabilities)            $400,000                       $650,000

whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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