In the fourth year of the Vidler Project, 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

Free cash flow is calculated as net income plus depreciation (since depreciation is a non-cash expense) minus capital expenditures. In this case, net income is calculated as revenues minus variable costs, fixed costs, and depreciation. So, net income = $4,750,000 - $4,000,000 - $570,000 - $180,000 = $0. Since there's no mention of capital expenditures, we assume it to be $0 for this calculation. Therefore, free cash flow = $0 + $180,000 - $0 = $180,000. Hence, both statements A and B are true.

In the Fourth Year of the Vidler Project, Expected Revenues