Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses by $700,000, and depreciation and amortization by $300,000 during 2011. For this project, the firm will purchase $800,000 of equipment during the year while decreasing its inventory by $200,000 (with no corresponding decrease in current liabilities). The marginal tax rate for Amsted is 35 percent. What is this project’s incremental after-tax free cash flow for 2011?
A. 475,000
B. 975,000
C. 675,000
D. 275,000
Calculation of project's incremental after tax free cashflow for 2011 | |||||
Free cashflow= Net income+Non cash expenses-Increase in working capital-Capital Expenditure | |||||
Calculation of incremental net income | |||||
Amount in $ | |||||
a) | Increased revenue | 2500000 | |||
b) | Cash operating expenses | 700000 | |||
c) | Depreciation | 300000 | |||
d) | Profit before tax (d=a-b-c) | 1500000 | |||
e) | Tax @ 35% | 525000 | |||
f) | Net income (f=d-e) | 975000 | |||
Free cashflow= $(975000+300000-(-200000)-800000) | |||||
$675,000 |
Correct answer-Option C
Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses...
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