How much cash flow before tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm's tax rate is 35%?

Question

Quizplus · Accepted Answer

Total cash outflows for equity investors and interest payments = $4 million + $2 million = $6 million
Let X be the necessary cash flow before tax and interest
After-tax cash flow = X - 0.35X = 0.65X
0.65X = $6 million
X = $9.23 million
Therefore, the necessary cash flow before tax and interest is $9.23 million, which is higher than option A, B, and D. Only option C ($8.15 million) is lower than the calculated amount, making it the best choice.

How Much Cash Flow Before Tax and Interest Is Necessary