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Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses...

Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses by $700,000, and depreciation and amortization by $300,000 during 2011. For this project, the firm will purchase $800,000 of equipment during the year while decreasing its inventory by $200,000 (with no corresponding decrease in current liabilities). The marginal tax rate for Amsted is 35 percent. What is this project’s incremental after-tax free cash flow for 2011?

A. 475,000

B. 975,000

C. 675,000

D. 275,000

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Answer #1
Calculation of project's incremental after tax free cashflow for 2011
Free cashflow= Net income+Non cash expenses-Increase in working capital-Capital Expenditure
Calculation of incremental net income
Amount in $
a) Increased revenue 2500000
b) Cash operating expenses 700000
c) Depreciation 300000
d) Profit before tax (d=a-b-c) 1500000
e) Tax @ 35% 525000
f) Net income (f=d-e) 975000
Free cashflow= $(975000+300000-(-200000)-800000)
$675,000

Correct answer-Option C

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