Question

Ronnie's coffee house is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. if the project is implemented, taxes will increase by $1,300. the additional depreciation expense will be $1,000. an initial cash outlay of $2,000 is required for net working capital. what is the amount of the end of year free cash flow?

a. $4,200
b. $3,500
c. $2,000
d. $1,500
e. $2,200

Answer 1

To calculate the end of year free cash flow for Ronnie's Coffee House project, we start with sales of $6,000 and then adjust for cash expenses, taxes, depreciation, and net working capital outlay. The correct free cash flow, based on the figures provided, is $1,200, which is not listed in the answer options a through e.

Step-by-step explanation:

To calculate the free cash flow from Ronnie's Coffee House project, we should start with the sales and subtract the increased costs and taxes. Depreciation is a non-cash expense that would be added back in, and finally, adjustments for net working capital should be made.

• Sales: $6,000
• Less Cash Expenses: -$2,500
• Less Taxes: -$1,300
• Add Back Depreciation: +$1,000
• Less Initial Cash Outlay for Net Working Capital: -$2,000

Using these figures:

Free Cash Flow = Sales - Cash Expenses - Taxes + Depreciation - Net Working Capital Outlay
Free Cash Flow = $6,000 - $2,500 - $1,300 + $1,000 - $2,000
Free Cash Flow = $1,200

Therefore, none of the provided options (a through e) are correct for the end of year free cash flow, which is $1,200.