Next year, Zenith Corp. is expected to generate $853 million in sales (revenues), spend $362 million in operating costs, spend $63 million on long-term assets, and increase net working capital by $31 million. It is expected to book $50 million in depreciation. The corporate tax rate is 22%. What is the forecast for next year’s free cash flow?

Enter your answer in millions and round to the nearest one-hundredth of a million dollars. Do not include the dollar sign ($).

Question

Next year, Zenith Corp. is expected to generate $853 million in sales (revenues), spend $362 million in operating costs, spend $63 million on long-term assets, and increase net working capital by $31 million.  It is expected to book $50 million in depreciation.  The corporate tax rate is 22%.  What is the forecast for next year’s free cash flow?

Enter your answer in millions and round to the nearest one-hundredth of a million dollars.  Do not include the dollar sign ($).

BlackTom AI · Accepted Answer

Free cash flow (FCF) equals after-tax operating profit plus noncash charges minus cash investments: FCF = EBIT*(1 − tax) + Depreciation − Capital Expenditures − ΔNWC.

1) Relevant concepts
- EBIT (operating profit) = Sales − Operating costs − Depreciation (depreciation is an operating noncash charge).
- NOPAT (net operating profit after tax) = EBIT*(1 − tax rate).
- Depreciation is added back because it reduced taxable income but did not use cash.
- Capital expenditures (CapEx) and increases in net working capital are cash outflows that reduce FCF.

2) Step-by-step calculations (all figures in millions)
- Sales = 853.0
- Operating costs = 362.0
- Depreciation = 50.0
- CapEx = 63.0
- ΔNWC = 31.0
- Tax rate = 22% = 0.22

3) Compute EBIT
EBIT = Sales − Operating costs − Depreciation
EBIT = 853.00 − 362.00 − 50.00 = 441.00

4) Compute NOPAT
NOPAT = EBIT*(1 − tax) = 441.00*(1 − 0.22) = 441.00*0.78 = 343.98

5) Compute Free Cash Flow
FCF = NOPAT + Depreciation − CapEx − ΔNWC
FCF = 343.98 + 50.00 − 63.00 − 31.00
FCF = 393.98 − 94.00 = 299.98

6) Why this is correct
- Depreciation reduced EBIT and taxes but did not consume cash, so it is added back after computing taxes on EBIT.
- CapEx and increases in working capital are real cash outflows and therefore reduce FCF.
- No interest or financing items are given, so we compute unlevered free cash flow using operating items only.

7) Other common mistakes (why alternate results would be wrong)
- Omitting depreciation from the EBIT calculation (or failing to add it back) leads to double-counting or missing the noncash adjustment.
- Applying tax to Depreciation or subtracting CapEx before computing taxes would misstate taxable income or cash flows.

Conclusion: The forecast for next year’s free cash flow is 299.98 (millions), which matches the provided answer.

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