Angie's Sub Shop expects to sell 200,000 subs next year at an average price of $5.00. Variable cost of a sub is $3.00. Cash fixed costs are $85,000, depreciation $95,000 and the tax rate is 25%
If the price increases to $5.50 and all other variables remain the same, how much will free cash flow increase?
Answer:
Subs sold 200,000 200,000
Revenue $1,000,000 $1,100,000
Variable cost -600,000 -600,000
Depreciation -95,000 -95,000
Fixed cost -85,000 -85,000
Operating Income $220,000 $320,000
Taxes -55,000 -80,000
NOPAT $165,000 $240,000
FCF $260,000 $335,000
Free cash flow will increase by $75,000
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