Expected cash flows: FireRock Wheel Corp is evaluating a project in which there

Question

Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $3 million and a 60 percent probability of revenues totaling $1 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?

Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $3 million and a 60 percent probability of revenues totaling $1 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?

$620,000 $200,000 $600,000 $420,000

Explanation / Answer

Answer:

Expected Total Revenue = 40% of $ 3,000,000 + 60% of $ 1,000,000 = $ 1,800,000

Less: Expected Cash Expenses = $ 1,000,000

Expected Cash Profit before depreciation and tax = $ 800,000

Less: Depreciation (Non cash) = $ 200,000

Income before Tax = $ 600,000

Less: Tax@30% = $ 180,000

Profit After Tax = $ 420,000

Add: Depreciation = $ 200,000

Free Cash Flow from the project = $ 620,000

The Correct answer if $ 620,000 that is Option a.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.