A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

A) $416,250

B) $374,625

C) $341,250

D) $499,500

A) $416,250

Explanation:

The computation of the free cash flow is shown below:

= (Cash revenues generated - cash expenses - depreciation expense) * (1 - tax rate) + depreciation expense

= ($1,300,000 - $700,000 - $75,000) * (1 - 0.35) + $75,000

= $525,000 * 0.65 + $75,000

= $416250

Simply we added the depreciation expense in the Earning after tax amount

The (Cash revenues generated - cash expenses - depreciation expense) * (1 - tax rate) is also known as Earning after tax