emporary Housing Services Incorporated (THSI) is considering a project that invo

Question

emporary 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 $5 million to setup and will generate $24 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $10 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. $12.25 million

B. 5.80 million

C. $9.80 million

D. $ 5.00 million

Explanation / Answer

Cash Flow From Operating Activities = EBIT + Depreciation - Taxes

Taxes=4200000

=12000000+2000000-4200000

=9.80 million

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