Question

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

Year 0 Profit after taxes = $4 million Depreciation = $1.5 million Fixed assets = $2 million Net working capital = $1 million.
Year 1 Profit after taxes = $5 million Depreciation = $2 million Fixed assets = $6 million Net working capital = $2 million.

Calculate the free cash flow for Year 1.

Answer 1

Free cash flow for year 1 = -$1m

Step-by-step 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.