Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projections:
-The free cash flow for the first year of Epiphany's project is closest to:
A)$43,000.
B)$25,000.
C)$40,800.
D)$45,000.

Question

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projections: 
-The free cash flow for the first year of Epiphany's project is closest to:
A)$43,000. 
B)$25,000. 
C)$40,800. 
D)$45,000.

Quizplus · Accepted Answer

To calculate free cash flow, we need to subtract the cash expenses from the cash inflows. Therefore, 
FCF1 = (Revenue1 - Operating Costs1 - Depreciation1 - Taxes1) + Depreciation1 - CapEx1
FCF1 = (120,000 - 50,000 - 30,000 - 12,000) + 30,000 - 5,200
FCF1 = $52,800 - $5,200
FCF1 = $47,600

So, the closest answer choice is C) $40,800.

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