You are considering opening another restaurant in the TexasBurgers chain The new

Question

You are considering opening another restaurant in the TexasBurgers chain The new restaurant will have annual revenue of $300,000 and operating expenses of $ 150,000. The annual depreciation and amortization for the assets used in the restaurant 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 restaurant, but no additions to working capital will be required The marginal tax rate will be 40 percent Calculate the incremental annual free cash flow for the project.

Explanation / Answer

To find our Free Cash Flow (or FCF) we must first find our Net Income, which is equal to: Revenue - Operating expenses - Depreciation = Taxable Income Taxable income x (1 - Tax Rate) = Net Income That is 300,000 - 150,000 - 50,000 = 100,000 Then our Net income would be 100,000 x (1-0.40) = 60,000 Free Cash Flow = Net Income + Depreciation - Capital expenditures We must add back Deprecation because it was a non cash expense and remove capex because it is a use of cash. 60,000 + 50,000 - 10,000 = 100,000 which the incremental Free Cash Flow for each year.

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