Final answer:
The free cash flow of a project will increase when the depreciation expense increases, as it is a non-cash charge that lowers taxes without decreasing cash. Other factors such as decreased EBIT, increased net working capital, or lowered sales projections generally lead to a reduction in free cash flow.
Step-by-step explanation:
The project's free cash flow, which represents the cash a company generates after accounting for cash outflows to support operations and maintain capital assets, will increase when certain financial actions occur within the business. Specifically, the free cash flow will increase due to the following:
- Depreciation expense increases, which is a non-cash expense and thereby increases free cash flow because it reduces taxable income without a cash outflow.
Regarding the other options, an increase in earnings before interest and taxes (EBIT) would increase free cash flow, not a decrease. An increase in net working capital requirement would consume more cash, thereby reducing free cash flow. Lower sales projections would likely decrease free cash flow unless there was a disproportionate decrease in costs.
In the context of reinvesting, it's important to note that effective reinvestment relies on having a robust free cash flow, ensuring that the business continues to grow by generating additional sales and an even larger cash flow in subsequent sales periods.