A firm reports that in a certain year it had revenues of $4.5 million,costs of $1.2 million,a capital cost allowance (CCA)deduction of $2.8 million,capital expenditures of $2.3 million,and net working capital decreased by $1.5 million.If the firm's marginal corporate tax rate is 30%,what is the firm's free cash flow for that year?

Question

Quizplus · Accepted Answer

Free Cash Flow (FCF) is calculated as follows: FCF = [Revenues - Costs - Taxes] + Depreciation - Capital Expenditures + Change in Net Working Capital. Here, Taxes = (Revenues - Costs - CCA) * Tax Rate = ($4.5M - $1.2M - $2.8M) * 30% = $0.5M * 30% = $0.15M. So, FCF = [$4.5M - $1.2M - $0.15M] + $2.8M - $2.3M + (-$1.5M) = $3.05M + $2.8M - $2.3M - $1.5M = $2.05M. The correct calculation leads to $2.05 million, which is not an option provided, indicating a possible mistake in the calculation or interpretation of the options. Given the options, the closest or intended correct answer might be $2.35 million, but this appears to be based on a misunderstanding or error in the calculation process.

A Firm Reports That in a Certain Year It Had