Question

A firm’s total net operating capital for the previous year was $9.3 million. For the current year, its total net operating capital is $10 million and its NOPAT is $1.2 million. What is its free cash flow for the current year?

Answer 1

$0.5 million

Step-by-step explanation:

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

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

So, the computation of the free cash flow is shown below:

= NOPAT - Change in Net Working Capital

= $1.2 million - $0.7 million

= $0.5 million

The change in net operating capital would be

= Total net operating capital in current year - total net operating capital in previous year

= $10 million - $9.3 million

= $0.7 million