Question

ALI Company reported sales of $ 9,250 this year and operating expenses other than depreciation of $ 5,750 and depreciation expense of $ 700. The company does not recognize amortization costs, in addition it has outstanding bonds payable of $ 3,200 with an interest rate of 5% per annum. The tax imposed by the government on company profits is 35%. In order to be able to sustain its business and generate income and cash flow in the future, the company needs an investment of $ 1,250 to purchase new fixed assets such as machinery and equipment and requires a working capital of $ 300 operating.

Question

How much is the company's profit (net income) and the amount of free cash flow?
Make calculations with the steps and explanations!

Answer 1

The net income is computed as follows:

= (Sales - operating expenses other than depreciation - depreciation - bond amount x interest rate) x (1 - tax rate)

= ($ 9,250 - $ 5,750 - $ 700 - $ 3,200 x 5%) x 0.65

= $ 2,640 x 0.65

= $ 1,716

FCF is computed as follows:

= (Sales - operating expenses other than depreciation - depreciation) x (1 - tax rate) + depreciation - Investment in fixed assets - Investment in working capital

= ($ 9,250 - $ 5,750 - $ 700) x (1 - 0.35) + $ 700 - $ 1,250 - $ 300

= $ 2,800 x 0.65 + $ 700 - $ 1,550

= $ 1,820 + $ 700 - $ 1,550

= $ 970

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