Question

You have the following data for Year 0 and Year 1:

Answer 1

Answer:

Free cash flow for year 1 = -$1m

Explanation:

Lets first understand what free cash flow is. Free cash flow is the cash generated by a business that is freely available for distribution to all investors after having met all the immediate obligations, investment in non-current assets and investment in working capital. Since it's cash flows we have to add back non-cash items such as depreciation and amortization.

The question is asking for free cash flow for year 1 therefore we take data for the year 1 as follows:

Free cash flow for year 1 = $5m + $2m - $6m - $2m  

Free cash flow for year 1 = -$1m

Seems entity has net cash outflows that's why the cash flows are negative.