Question

Temporary Housing Services Incorporated​ (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $ 6 million to set up and will generate $ 23 million in revenues during its first and only year in operation​ (paid in one​ year). Operating expenses are expected to total $ 12 million during this year and depreciation expense will be another $ 2 million. THSI will require no working capital for this investment. ​ THSI's marginal tax rate is​ 35%.Ignoring the original investment of $5 million, what is THSI's free cash flow for the first and only year of operation?

a. $5.0 million
b. $3.75 million
c. $8.0 million
d. $6.25 million

Answer 1

c.$8.0 million

Step-by-step explanation:

Free cash flows will be $23

Less; operating expenses ($12)

Less; Depreciation ($2)

Cash flows net $9

Tax at 35% ($3.15)

Net free cash flows $5.85

Add; Depreciation $2

Free cash flows $7.85 million (round off $8.0 million)