Question text 2Marks A company forecasts yearly revenue of $2,000,000 and yearly operating costs of $1,300,000. At the end of year one, accounts receivable increase by $100,000, inventory increases by $60,000, and accounts payable increase by $30,000. The tax rate is 30%. What is the free cash flow at the end of year one (i.e., FCF in year 1), rounded to the nearest dollar? [Type only the final answer into the response box below (NOT into the Notes box) and in pure numeric format (e.g. 10 or -10). Do NOT use %/$ signs, commas or spaces (e.g. only enter 10 if it is 10 days/$10/10%)] Answer 2[input] Notes Report question issue Question 7 NotesMultiple fill-in-the-blank
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Question text 2Marks A company forecasts yearly revenue of $2,000,000 and yearly operating costs of $1,300,000. At the end of year one, accounts receivable increase by $100,000, inventory increases by $60,000, and accounts payable increase by $30,000. The tax rate is 30%. What is the free cash flow at the end of year one (i.e., FCF in year 1), rounded to the nearest dollar? [Type only the final answer into the response box below (NOT into the Notes box) and in pure numeric format (e.g. 10 or -10). Do NOT use %/$ signs, commas or spaces (e.g. only enter 10 if it is 10 days/$10/10%)] Answer 2[input] Notes Report question issue Question 7 NotesMultiple fill-in-the-blank

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BlackTom AI · Accepted Answer

Free cash flow (FCF) is based on after-tax operating profit (NOPAT) less the increase in net working capital (and adjusted for capex/depreciation if given). Here no depreciation or capex are reported, so FCF = NOPAT − ΔNWC.

1) Compute operating profit (EBIT):
Revenue − Operating costs = 2,000,000 − 1,300,000 = 700,000

2) Compute taxes and NOPAT:
Tax = 30% of EBIT = 0.30 × 700,000 = 210,000
NOPAT = EBIT − Tax = 700,000 − 210,000 = 490,000

3) Compute change in net working capital (ΔNWC):
ΔNWC = ΔAccounts Receivable + ΔInventory − ΔAccounts Payable
= 100,000 + 60,000 − 30,000 = 130,000
(Explanation: increases in accounts receivable and inventory tie up cash → use of cash; an increase in accounts payable is a source of cash because the firm delays payments.)

4) Compute FCF:
FCF = NOPAT − ΔNWC = 490,000 − 130,000 = 360,000

Why this is correct: we tax operating profit because FCF is cash available to all capital providers after taxes on operating earnings; we subtract the net increase in working capital because those amounts reduce cash available in the period. No capex or noncash charges were specified, so none are included.

Common mistakes to avoid: (a) forgetting to apply taxes to EBIT, (b) failing to subtract increases in AR/inventory, or (c) incorrectly treating an increase in accounts payable as a cash outflow. No alternative choices are provided here; the correct calculated value is 360000, which matches the provided answer.