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

incremental after tax cash flow for 2011: $1,145,000

Explanation:

Additional revenue                                                 $2,500,000

Cash operating expenses                                       ($700,000)

Depreciation and amortization expenses               ($300,000)

Reduced inventories                                               ($200,000)

Pretax income                                                         $1,300,000

Less taxes 35%                                                        ($455,000)

Net income                                                                $845,000

Add Depreciation and amort. expenses                  $300,000

Free cash flow                                                           $1,145,000

b is the correct answer