Calculation Of Incremental And Free Cash Flows

Question

1. The Natural Candy Co. will release a new range of ‘healthy’ lollies containing antioxidants. New equipment to manufacture the lollies will cost $2million, which will be depreciated by straight-line depreciation over five years. In addition, there will be $5million spent on promoting the new line. It is expected that the range of lollies will bring in revenues of $4million per year for five years with production and support costs of $1.5 million per year. If the Natural Candy Co’s marginal tax rate is 30%, what are the incremental free cash flows in the second year of this project?

A. $1.03 million
B. $1.87 million
C. $2.47 million
D. $2.50 million

2. Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a cyclone. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12million during this year and depreciation expense will be another $3million. THSI will require no working capital for this investment. THSI’s tax rate is 30%.

Ignoring the original investment of $5million, what is THSI’s free cash flow for the first and only year of operation?

A. $5.0 million
B. $3.50 million
C. $8.0 million
D. $6.50 million

Summary

These short questions belong to Finance. The 1st question is about calculating incremental free cash flows with income tax rate given. And the 2nd question is about calculating free cash flow for first year of operation.

Total Word Count 90

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.