A firm has sales of $50,000, EBIT of $10,000, depreciation of $4,000, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and a $1,000 increase in net operating working capital, what is the firm's free cash flow?
A)$10,000
B)$9,000
C)$8,000
D)$1,200

Question

Quizplus · Accepted Answer

Free Cash Flow = EBIT(1-T) + Depreciation - Capital Expenditures - Increase in Net Operating Working Capital

We are given:
Sales = $50,000
EBIT = $10,000
Depreciation = $4,000
Tax Rate = 30%
Increase in Net Operating Working Capital = $1,000
Fixed Assets Increased = $2,000

First, we need to calculate the capital expenditures:
Capital Expenditures = Increase in Fixed Assets = $2,000

Next, we need to calculate the free cash flow:
Free Cash Flow = $10,000(1-0.30) + $4,000 - $2,000 - $1,000 = $8,000

Therefore, the best choice is C, as it is the only option that correctly calculates the free cash flow based on the given information.

A Firm Has Sales of $50,000, EBIT of $10,000, Depreciation