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. If 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

Expected revenue = (0.4 x 3,000,000) + (0.6 x 1,000,000) = 1,800,000
Taxable income = (1,800,000 - 1,000,000 - 200,000) = $600,000
Taxes = 0.3 x 600,000 = $180,000
Operating cash flow (OCF) = revenue - cash expenses - depreciation = 1,800,000 - 1,000,000 - 200,000 = $600,000
Free cash flow (FCF) = OCF - taxes = 600,000 - 180,000 = $420,000

Therefore, the expected free cash flow from taking the project is $420,000. The correct answer is D.

Expected Cash Flows: FireRock Wheel Corp Is Evaluating a Project