Expected cash flows: FireRock Wheel Corp is evaluating a project in which there is a 40 percent probability of revenues totaling $3 million and a 60 percent probability of revenues totaling $1 million per year. Its cash expenses will be $1.0 million while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?

Question

Quizplus · Accepted Answer

To calculate the expected free cash flow, we need to calculate the expected operating cash flow and subtract the expected taxes.

Expected operating cash flow = (0.4 x $3 million) + (0.6 x $1 million) - $1 million - $200,000
Expected operating cash flow = $1.2 million + $0.6 million - $1.2 million
Expected operating cash flow = $0.6 million

Expected taxes = 0.3 x ($0.6 million - $200,000)
Expected taxes = $102,000

Expected free cash flow = $0.6 million - $102,000
Expected free cash flow = $518,000

Therefore, the best choice is D, $620,000.

Expected Cash Flows: FireRock Wheel Corp Is Evaluating a Project