Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation.The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital.By how much did the firm's net income exceed its free cash flow?

Question

Quizplus · Accepted Answer

Net Income Calculation:- Sales: $9,250- Operating Costs: $5,750- Depreciation: $700- EBIT (Earnings Before Interest and Taxes) = Sales - Operating Costs - Depreciation = $9,250 - $5,750 - $700 = $2,800- Interest Expense = 5% of $3,200 = $160- EBT (Earnings Before Taxes) = EBIT - Interest Expense = $2,800 - $160 = $2,640- Taxes = 25% of EBT = 0.25 * $2,640 = $660- Net Income = EBT - Taxes = $2,640 - $660 = $1,980Free Cash Flow Calculation:- EBIT = $2,800- Taxes = $660- NOPAT (Net Operating Profit After Taxes) = EBIT - Taxes = $2,800 - $660 = $2,140- Depreciation = $700 (non-cash charge, so we add it back)- Capital Expenditures = $1,250- Change in Net Operating Working Capital = $300- Free Cash Flow = NOPAT + Depreciation - Capital Expenditures - Change in Net Operating Working Capital = $2,140 + $700 - $1,250 - $300 = $1,290Difference between Net Income and Free Cash Flow:- Net Income = $1,980- Free Cash Flow = $1,290- Difference = Net Income - Free Cash Flow = $1,980 - $1,290 = $690The correct answer is not listed exactly, but the closest to the calculated difference ($690) is:B) $693.50

Bartling Energy Systems Recently Reported $9,250 of Sales, $5,750 of Operating