Final answer:
The total free cash flow for ABC Corp. in 2001 is calculated by starting with the net income, adjusting for taxes saved on interest, adding back depreciation, and accounting for changes in working capital, resulting in a free cash flow of $96.8 million.
Step-by-step explanation:
To calculate the total free cash flow for ABC Corp. in the year 2001, we need to account for the net income (NI), depreciation, and changes in net operating working capital (NOWC). However, interest does not factor into free cash flow directly, although it affects net income because the interest expense is tax-deductible.
First, we start with the net income for 2001, which is $72 million. From there, we add back the non-cash depreciation expense of $28 million, as this does not require an outflow of cash. Then, we need to adjust for changes in working capital. In 2000, the NOWC was $64 million, and in 2001 it is $63 million, which means there was a decrease of $1 million. A reduction in NOWC is equivalent to a cash inflow (since it means less cash is tied up in working capital).
Before adding these numbers, we need to account for taxes saved on interest. With a tax rate of 30%, the tax shield on the interest expense (which is not subtracted in free cash flow calculations since it's a financing activity) is 30% of $14 million = $4.2 million. This should be deducted from the net income before adding back depreciation and change in working capital.
So the calculation for free cash flow in 2001 would be: (Net income - Tax shield) + Depreciation + Decrease in NOWC = ($72 million - $4.2 million) + $28 million + $1 million = $96.8 million.
Therefore, the total free cash flow for ABC Corp. in 2001 is $96.8 million.