Part 1This year, FCF Inc. has earnings before interest and taxes of $9,190,0009,190,000, depreciation expenses of $700,000700,000, capital expenditures of $1,300,0001,300,000, and has increased its net working capital by $575,000575,000. If its tax rate is 25 %25%, what is its free cash flow? Part 1The company's free cash flow is $[input]enter your response here . (Round to the nearest dollar.)

Question

Part 1This​ year, FCF Inc. has earnings before interest and taxes of ​$9,190,0009,190,000​, depreciation expenses of ​$700,000700,000​, capital expenditures of ​$1,300,0001,300,000​, and has increased its net working capital by ​$575,000575,000. If its tax rate is 25 %25%​, what is its free cash​ flow? Part 1The​ company's free cash flow is ​$[input]enter your response here .  ​(Round to the nearest​ dollar.)

BlackTom AI · Accepted Answer

Free cash flow (FCF) equals after-tax operating cash flow plus non-cash charges minus investments in fixed and working capital: FCF = EBIT*(1 − Tax rate) + Depreciation − Capital Expenditures − ΔNet Working Capital.

1) Relevant concepts
- EBIT is operating earnings before interest and taxes; taxes must be applied to get after-tax operating profit (also called NOPAT).
- Depreciation is a non-cash expense and must be added back to cash flow.
- Capital expenditures (CapEx) and increases in net working capital (ΔNWC) are cash outflows and reduce free cash flow.

2) Step-by-step reasoning and 3) intermediate calculations
- Given: EBIT = $9,190,000; Depreciation = $700,000; CapEx = $1,300,000; ΔNWC = $575,000; Tax rate = 25%.
- Compute after-tax operating profit (NOPAT): EBIT × (1 − Tax rate)
  = $9,190,000 × (1 − 0.25)
  = $9,190,000 × 0.75
  = $6,892,500.
- Add back depreciation (non-cash): $6,892,500 + $700,000 = $7,592,500.
- Subtract capital expenditures: $7,592,500 − $1,300,000 = $6,292,500.
- Subtract increase in net working capital: $6,292,500 − $575,000 = $5,717,500.

4) Why this answer is correct
Each term is treated according to cash-flow logic: tax on operating earnings is paid (hence EBIT is reduced by 25%), depreciation is non-cash so added back, and actual cash investments (CapEx and increases in NWC) reduce the free cash available to investors. Applying these operations produces $5,717,500.

5) Common mistakes (why incorrect approaches are wrong)
- Using EBIT without applying taxes would overstate FCF.
- Forgetting to add back depreciation would understate FCF.
- Omitting ΔNWC or CapEx would overstate FCF.
These errors lead to values different from $5,717,500.

6) Conclusion
The company’s free cash flow is $5,717,500, which matches the provided answer (5717500).

Similar Questions

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