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Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $4 million and a 60 percent probability of revenues totaling $2 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $300,000. What is the expected free cash flow from taking the project if the marginal tax rate for the firm is 25 percent

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abiolataiwo2015

Answer:

$1,425,000

Explanation:

Calculation to determine the expected free cash flow

Expected revenue$2,800,000

[(40%*$4 million)+(60%*$2 million)]

Less Cash Expenses $1,000,000

Less Depreciation Expense $300,000

EBIT$1,500,000

($2,800,000-$1,000,000-$300,000)

Tax $375,000

(25%*$1,500,000)

Net Income $1,125,000

($1,500,000-$375,000)

Add Depreciation Expense $300,000

Free Cash Flow $1,425,000

($1,125,000+$300,000)

Therefore the expected free cash flow is $1,425,000