Pro forma free cash flows for a proposed project should:
i.exclude the cost of employing existing assets that could be sold anyway.II.exclude interest expense.III.include the depreciation tax shield related to the project.IV.exclude any required increase in operating current assets.
A) I and II only
B) II and III only
C) II and IV only
D) I,III,and IV only
E) I,II,III,and IV

Question

Quizplus · Accepted Answer

II and III onlyPro forma free cash flows should exclude interest expense because free cash flow aims to measure the cash a company generates from its operations, independent of its capital structure. It should include the depreciation tax shield because this represents a cash flow benefit to the project by reducing taxable income. Costs of employing existing assets and changes in operating current assets are relevant cash flows and should not be excluded.

Pro Forma Free Cash Flows for a Proposed Project Should