Question

A company reported $10,000 of sales, $5,000 of operating costs other than depreciation, and $2,000 of depreciation. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $1,000 to buy new fixed assets and to invest $1,000 in net operating working capital. Its tax rate was 25%. How much was its free cash flow? $1,800 $2,800 $2,250

Answer 1

Answer:

$2,250

Explanation:

The computation of the free cash flow is shown below:

= Earning before income and tax × ( 1- tax rate) + depreciation expense - capital expenditure - net operating working capital

where,

Earning before income and tax = Sales - operating cost - depreciation expense

= $10,000 - $5,000 - $2,000

= $3,000

And other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $3,000 × ( 1 - 25%) + $2,000 - $1,000 - $1,000

= $2,250 + $2,000 - $2,000

= $2,250