Question

You have forecast pro forma earnings of $ 1 comma 031 comma 000. This includes the effect of $ 175 comma 000 in depreciation. You also forecast a decrease in working capital of $ 108 comma 000 that year. What is your forecast of free cash flows for that​ year?

Answer 1

Forecast Free Cashflow: $

Forecast earnings 1,031,000

Add: Depreciation 175,000

Add: Decrease in working capital 108,000

Forecast free cashflow 1,314,000

Step-by-step explanation:

Free cashflow is the aggregate of forecast earning, depreciation and decrease in working capital. Depreciation is added back to the forecast earnings because it does not involve movement of cash. Decrease in working capital is also added to the forecast earnings because it is an inflow of cash.