Answer:
The right choice is option (D).
Explanation:
The scenario provides the following information:
Operating Income (EBIT) = $2,500,000
Depreciation Expense = $500,000
Tax rate = 40%
Net investment = $1,000,000
Thus, we can determine BBC's free cash flow using this formula:
= EBIT × (1 - Tax Rate) + Depreciation & Amortization - Net investment
Insert the values into the formula above:
So, the calculation becomes:
= $2,500,000 × (1 - 40%) + $500,000 - $1,000,000
= $1,500,000 + $500,000 - $1,000,000
= $1,000,000