Question

A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. The project would also 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 40 percent marginal tax rate?

Answer 1

Answer:

$3.4 million

Explanation:

The computation of the free cash flow is shown below:

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

where,

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

= $12 million - $2 million - $5 million - $1 million

= $4 million

All other items values would remain the same

Now put these values to the above formula  

So, the value would equal to

= $4 million × ( 1 - 40%) + $1 million

= $2.4 million + $1 million

= $3.4 million