Question

My existing business generate $135000 in EBIT. The corporate tax rate applicable to my business is 35%. Deprecaition reported in the financial statement is $25714. I don't need to spend any more for new equipment; however, I need $20250 additiona cash. I need to purchase $10800 in additional supplies such tableclothes and napkins on credit. It is also estimated that my accrual including taxes and wage payable will increase by $6750. Based on the information provided what will be my Free Cash Flow (FCF)?

Answer 1

Answer: $99,964

Explanation:

Given that,

EBIT = $135,000

Corporate tax rate = 35% of $135,000 = $47,250

Depreciation = $25,714

Need additional cash = $20,250

Additional supplies = $10,800

Accrual including taxes and wage payable will increase by $6,750

Operating cash flow = EBIT - Taxes + Depreciation

                                  = $135,000 - $47,250 + $25,714

                                  = $113,464

Investment in operating capital = Additional capital expenditure + Increase in NWC( net working capital)

                                              = $0 + [($20,250 + $10,800) - ($10,800 + $6750)

                                              = $13,500

Free Cash Flow (FCF) = Operating cash flow - Investment in operating capital

                                    = $113,464 - $13,500

                                    = $99,964