Question

The following financial information is taken from the annual reports of the Jackson Company and the Pearce Company: Jackson Pearce Cash flow from operating activities $500,000 $1,500,000 Cash investment in property & equipment 150,000 480,0001. Calculate the free cash flow for each company.2. Which firm has better cash flow health?Jackson /Pearce

Answer 1

1. Jackson = $350,000 and Pearce = $1,020,000

2. Pearce

Step-by-step explanation:

The formula to compute the free cash flow is shown below:

= EBIT × (1 -Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - net capital Expenditure

But for this question, the formula would be

= Cash flow from operating activities - Cash investment in property & equipment

1. For Jackson, it would be

= $500,000 - $150,000

= $350,000

For Pearce, it would be

= $1,500,000 - $480,000

= $1,020,000

2. If we see and compare the free cash flow, the Pearce has better cash flow due to the high cash flow from operating activities