Question

Next year, Flying Cow is expected to earn an EBIT of $4,000,000, and to pay a federal-plus-state tax rate of 30%. It also expects to make $1,000,000 in new capital expenditures to support this level of business activity, as well as $45,000 in additional net operating working capital (NOWC).

Given these expectations, it is reasonable to conclude that next year Flying Cow will generate an annual free cash flow (FCF) of ___________ (rounded to the nearest whole dollar).

Answer 1

$1,755,000

Step-by-step explanation:

The computation of the free cash flow is shown below:

Free cash flow = EBIT × (1 -Tax Rate) - Change in Net Working Capital - net capital Expenditure

= $4,000,000 × (1 - 0.30) - $45,000 - $1,000,000

= $2,800,000 - $45,000 - $1,000,000

= $1,755,000

We simply applied the above formula to determine the free cash flow