Question

Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $3 million and a 60 percent probability of revenues totaling $1 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?

A) $200,000
B) $420,000
C) $600,000
D) $620,000

Answer 1

The expected free cash flow from taking the project is $600,000.

Step-by-step explanation:

To calculate the expected free cash flow from taking the project, we need to consider the probabilities of different revenue scenarios. In this case, there is a 40% probability of revenues totaling $3 million and a 60% probability of revenues totaling $1 million per year.

First, we need to calculate the cash inflows by multiplying the probability of each revenue scenario by the corresponding revenue amount:

$3 million * 0.40 + $1 million * 0.60 = $1.2 million + $0.6 million = $1.8 million

Next, we need to subtract the cash expenses and depreciation expense from the cash inflows to get the free cash flow:

$1.8 million - $1 million - $200,000 = $600,000

Therefore, the expected free cash flow from taking the project is $600,000.