Question

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Ignoring the original investment of $6 million, what is THSI's free cash flow for the first and only year of operation

-$6.00 million

-$3.85 million

-$9.81 million

-$7.85 million

Answer 1

Ignore initial investment

Then Free cash flows for thr first and only year of operation :-

Particulars	Amount ($)
Revenue	22,000,000
Less- Cost	11,000,000
Profit before depreciation and tax	11,000,000
Less- Depreciation	2,000,000
Profit before tax	9,000,000
Less- Tax@35%	3150000
Profit after tax	5,850,000
Add- Depreciation	2,000,000
Free cash flows	7,850,000

Free cash flows for first year = $ 7,850,000 = $ 7.85 miliion

Option D is correct.