A new project will generate annual revenue of $310,000 and will entail operating expenses of $140,000. The annual depreciation and amortisation for the assets used in the project will equal $50,000. An annual capital expenditure of $10,000 will be required to offset wear and tear on the assets used in the project but no additions to working capital will be required. The company tax rate will be 35 percent. What is the incremental annual free cash flow for the project?

To determine the incremental annual free cash flow (FCF) for the project, we need to follow these steps:

1. **Calculate the Earnings Before Interest and Taxes (EBIT):**
   \[
   \text{EBIT} = \text{Revenue} - \text{Operating Expenses} - \text{Depreciation and Amortisation}
   \]

2. **Calculate the Net Income:**
   \[
   \text{Net Income} = \text{EBIT} \times (1 - \text{Tax Rate})
   \]

3. **Calculate the Incremental Annual Free Cash Flow (FCF):**
   \[
   \text{FCF} = \text{Net Income} + \text{Depreciation and Amortisation} - \text{Capital Expenditure}
   \]

Now, let’s plug in the numbers:

1. **Revenue:** $310,000  
2. **Operating Expenses:** $140,000  
3. **Depreciation and Amortisation:** $50,000  
4. **Capital Expenditure:** $10,000  
5. **Tax Rate:** 35%

### Step-by-Step Calculation:

1. **EBIT:**
   \[
   \text{EBIT} = 310,000 - 140,000 - 50,000 = 120,000
   \]

2. **Net Income:**
   \[
   \text{Net Income} = 120,000 \times (1 - 0.35) = 120,000 \times 0.65 = 78,000
   \]

3. **Free Cash Flow:**
   \[
   \text{FCF} = 78,000 + 50,000 - 10,000 = 118,000
   \]

So, the incremental annual free cash flow for the project is **$118,000**.

Would you like any additional details or explanations? Here are some related questions:

1. How would changes in the tax rate affect the FCF?
2. What is the impact of increasing capital expenditure on the project’s cash flow?
3. How would variations in operating expenses influence the overall FCF?
4. Can FCF be negative, and what does that indicate about a project?
5. What is the significance of including depreciation and amortization in cash flow calculations?

**Tip:** Understanding Free Cash Flow is crucial for evaluating the profitability and financial health of a project, as it shows the cash available to investors after accounting for capital expenditures.

Learn how to calculate the incremental annual free cash flow (FCF) for a project generating $310,000 in revenue, $140,000 in operating expenses, with $50,000 in depreciation and $10,000 in capital expenditures. Includes a step-by-step breakdown of EBIT, Net Income, and FCF calculations for finance students.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation