In the 4th year of project M, expected revenues will be $4,750,000, variable costs will be $4,000,000, depreciation expense $180,000, and fixed cash costs $570,000. Which of the following is true?
A) Accounting income equals $0.00
B) Free cash flow equals $180,000
C) Free cash flow equals 0
D) Both A and B are true.

Question

Quizplus · Accepted Answer

To calculate accounting income, we subtract variable costs, fixed cash costs, and depreciation from revenues: $4,750,000 - $4,000,000 - $570,000 - $180,000 = $0.00, confirming choice A is true. For free cash flow, we consider operating cash flow minus capital expenditures. Here, operating cash flow is revenues minus variable and fixed costs (not including depreciation, as it's a non-cash expense), so $4,750,000 - $4,000,000 - $570,000 = $180,000, making choice B true as well. Therefore, both A and B are correct.

In the 4th Year of Project M, Expected Revenues Will