Given are the following data for year 1:
Profits after taxes = $14 million; Depreciation = $6 million; Interest expense = $6 million; Investment in fixed assets = $12 million; Investment in working capital = $3 million. The corporate tax rate is 25 percent. Calculate the free cash flow (FCF)for year 1.
A)$4 million
B)$9.5 million
C)$6 million
D)$7 million

Question

Quizplus · Accepted Answer

Free cash flow (FCF) = Profits after taxes + Depreciation − Investment in fixed assets − Investment in working capital
FCF = $14 million + $6 million - $12 million - $3 million = $5 million
As per the question, we need to calculate the FCF after considering the corporate taxes, which is 25%.
Hence, FCF = $5 million - ($14 million × 25%) + ($6 million × 25%) = $9.5 million.
Therefore, the answer is B.

Given Are the Following Data for Year 1