Question

Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. Free cash flow: What is Provo's free cash flow for 2008

Answer 1

Provo's free cash flow for 2008 is $2,600,000

              Income Statement

Revenue                        $10,000,000

Operating expenses   - $5,000,000

Depreciation               -  $1,000,000

EBIT                                $4,000,000

Interest expenses        - $0

Taxes                            - $1,600,000    (40% * $4,000,000)

Net Income                     $2,400,000

Depreciation                  +$1,000,000

Operating cash flow      $3,400,000

Free cash flow = Operating Cash flow - Purchase of equipment - Increase in Inventory

Free cash flow = $3,400,000 - $500,000 - $300,000

Free cash flow = $2,600,000

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