Question

A new project is expected to generate $800,000 in revenues, $250,000 in cash operating expenses, and depreciation expense of $150,000 in each year of its 10-year life. The corporation's tax rate is 35%. The project will require an increase in net working capital of $85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is the free cash flow from the project in year one

Answer 1

Answer: $410,000

Explanation:

To get the free cash flow the expenses first need to be removed from the revenue.

Revenue is $800,000 and expenses include Depreciation and Operating expenses.

= 800,000 - 250,000 - 150,000

= $400,000

Profit is $400,000 and this is the amount before tax.

Adjusting for taxes will give,

= 400,000 ( 1 - tax rate)

= 400,000 ( 1 - 35%)

= 400,000 (0.65)

= $260,000

Now that the After tax profit is known, the depreciation expenses should be added back because while it is tax deductible, it is not a cash expense as no physical cash is lost during depreciation so adding it back will show just how much physical cash the company has.

= 260,000 + 150,000

= $410,000

$410,000 will therefore be the free cash flow for year 1.