Final answer:
The free cash flow for Connor Designs is $379,500, computed by deducting capital expenditures used for maintenance from the net cash flows from operating activities.
Step-by-step explanation:
The free cash flow for Connor Designs can be calculated by taking the net cash flows from operating activities and subtracting the company's capital expenditures. As given, Connor Designs has net cash flows from operating activities of $425,000.
Out of the cash flows used for investments in property, plant, and equipment which totaled $65,000, 70% was used to replace machinery, which is equivalent to $45,500 (($65,000 * 70%) to maintain existing capacity).
The remainder presumably represents expenditures to increase capacity. The free cash flow can be calculated by reducing the net cash flow from operating activities by the amount used for maintenance. Hence, the calculation is $425,000 - $45,500, resulting in a free cash flow of $379,500.
Free Cash Flow Calculation
- Net cash flows from operating activities: $425,000
- Subtract investment in machinery for maintenance: $45,500 ($65,000 * 70%)
- Free Cash Flow: $425,000 - $45,500 = $379,500