Final answer:
The correct calculation for free cash flow involves adding depreciation and amortization to the net operating profit after taxes (NOPAT), making option (a) the correct choice.
Step-by-step explanation:
The correct statement regarding the calculation of free cash flow is indeed that net operating profit after taxes (NOPAT) is added to depreciation and amortization, which aligns with option (a). Free cash flow is a crucial financial metric that provides insights into a company's ability to generate cash after meeting its operating expenses and capital expenditure requirements.
Depreciation and amortization are non-cash expenses that represent the gradual reduction in the value of assets over time. In the context of calculating free cash flow, these amounts are added back to NOPAT. The rationale behind this addition is rooted in the fact that depreciation and amortization, being non-cash charges, do not require an actual outlay of cash. By adding them back to NOPAT, the calculation aims to reflect the genuine cash-generating capability of the company.
Free cash flow is a measure of the cash available to the company after covering its essential financial obligations, including operational expenses and capital expenditures necessary for maintaining and expanding its asset base. By incorporating NOPAT and adding back non-cash expenses like depreciation and amortization, the calculation adheres to the principle of assessing the actual cash generated by the business, providing a more accurate representation of its financial health and potential for future investments or shareholder returns.
In summary, option (a) correctly emphasizes that in the calculation of free cash flow, NOPAT is augmented by depreciation and amortization. This approach ensures a comprehensive evaluation of the cash-generating capacity of a company, considering both operating profits and non-cash expenses that do not involve immediate cash outflows.