Question

During​ 2019, Xeron Corporation had EBIT of​ $100,000, a change in net fixed assets of​ $400,000, an increase in net current assets of​ $100,000, an increase in spontaneous current liabilities of​ $400,000, a depreciation expense of​ $50,000, and a tax rate of​ 30%. Based on this​ information, NICO's free cash flow is​ ________. A. - ​$630,000 B. - ​$50,000 C. ​$650,000 D. - ​$30,000

Answer 1

$20,000

Step-by-step explanation:

The Free cash flows of the company can be found using the following formula:

Free Cash Flows = EBIT - Tax on Profits + Depreciation -/+ Increase in Net Fixed Assets -/+ Net increase or decrease in Working Capital

Here

EBIT are cash inflows and hence must be added

Tax on Profits are cash outflows and must be deducted

Depreciation are non cash items and its impact must be eliminated from EBIT, hence it must be deducted

Increase in Net Fixed Assets has been increased which is investment and investment is outflow of cash which means it must be deducted.

Net increase in Working Capital must be deducted because cash is spent to increase inventory and receivables which means increase in it is cash outflow and must be deducted whereas decrease must be added.

By putting values, we have:

Free Cash Flows = $100,000 - 30%*100,000 + $50,000 - ($400,000 Increase in Net Fixed Assets) + ($400,000 - $100,000 Decrease in Current Assets)

Free Cash Flows = $20,000