A company forecasts an EBIT of $393 million. The company has planned $249 million as capital expenditure and annual depreciation is $70 million. The working capital is expected to decrease by $23 million. You can assume the tax rate is 30%. Calculate the free cash flow to firm (FCFF) in millions.

If the answer is $10.4567 million, write 10.46 and do not write 10,356,700.

Question

A company forecasts an EBIT of $393 million. The company has planned $249 million as capital expenditure and annual depreciation is $70 million. The working capital is expected to decrease by $23 million. You can assume the tax rate is 30%. Calculate the free cash flow to firm (FCFF) in millions.

If the answer is $10.4567 million, write 10.46 and do not write 10,356,700.

BlackTom AI · Accepted Answer

FCFF = EBIT(1 − tax rate) + Depreciation − Capital Expenditure − ΔNet Working Capital.

1) Relevant concepts:
- EBIT(1 − tax rate) is NOPAT (net operating profit after tax). Taxes reduce operating profit, so use after-tax EBIT.
- Depreciation is a non-cash expense: add it back to cash flows.
- Capital expenditures (CapEx) are cash outflows: subtract.
- An increase in net working capital (ΔNWC > 0) is a use of cash (subtract); a decrease in NWC is a source of cash (subtracting a negative equals adding).

2) Step-by-step calculation with all intermediate steps:
- Given: EBIT = $393 million, tax rate = 30%, Depreciation = $70 million, CapEx = $249 million, Working capital is expected to decrease by $23 million (so ΔNWC = −23).
- Compute NOPAT: EBIT × (1 − tax rate) = 393 × (1 − 0.30) = 393 × 0.70 = 275.10 million.
- Add back Depreciation: 275.10 + 70.00 = 345.10 million.
- Subtract CapEx: 345.10 − 249.00 = 96.10 million.
- Adjust for ΔNWC (decrease of $23 million): subtract ΔNWC = −23 → 96.10 − (−23.00) = 96.10 + 23.00 = 119.10 million.

3) Why this is correct:
- We taxed EBIT to reflect after-tax operating profit, added back the non-cash depreciation, removed the cash outflow for CapEx, and treated the working-capital decrease as a cash inflow. Each sign follows standard FCFF convention.

4) Common mistakes (why other answers would be wrong):
- Forgetting to tax EBIT (using pre-tax EBIT instead of NOPAT) overstates FCFF.
- Subtracting depreciation (instead of adding it back) understates FCFF.
- Treating a decrease in working capital as a cash outflow instead of an inflow would understate FCFF by $23 million.

Conclusion: The FCFF equals $119.10 million, which matches the provided answer.

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