Question

A firm is considering taking a project that will produce $13 million of revenue per year. Cash expenses will be $4 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 30 percent marginal tax rate

Answer 1

$5.2 million

Step-by-step explanation:

The computation of the free cash flow is shown below:

We know that

Free cash flow = EBIT × (1 -Tax Rate) + Depreciation & Amortization

Here

EBIT = Revenues - decreased amount of cash revenues - cash expenses - depreciation

= $13 million - $2 million - $4 million - $1 million

= $6 million

Now the free cash flow is

= $6 million × ( 1 - 30%) + $1 million

= $4.2 million + $1 million

= $5.2 million