Question

You are considering opening another restaurant in the TexasBurgers chain The new restaurant will have annual revenue of $300,000 and operating expenses of $ 150,000. The annual depreciation and amortization for the assets used in the restaurant will equal $50,000. An annual capital expenditure of $10,000 will be required to offset wear and tear on the assets used in the restaurant, but no additions to working capital will be required The marginal tax rate will be 40 percent Calculate the incremental annual free cash flow for the project.

Answer 1

The incremental annual free cash flow for the project is $54,000.

Step-by-step explanation:

To determine the project's incremental yearly free cash flow, we must first compute the cash inflows and outflows.

The project's cash inflows are $300,000 in annual revenue and $150,000 in operating expenses and $50,000 in annual depreciation and amortization for the restaurant's assets. An yearly capital expenditure of $10,000 will be necessary to counteract wear and tear on the restaurant's assets. There will be no need for additional working capital.

The project's incremental annual free cash flow can be estimated using the following formula :

`\large{\implies{\bf{\boxed{Incremental \ Cash \ Flow = (Revenue \ - \ Expenses) \ - \ Initial \ Costs} }}}`

`\because` is an existing corporation operating a new restaurant, the initial costs are zero.

Therefore,

Incremental Annual Free Cash Flow = ($300,000 - $150,000 - $50,000 - $10,000) x (1 - 0.40) = $54,000.