48) Management expects a project to generate EBIT of $600,000 per year for 4 years.
is 40%. The project will require an increase in net working capital of $50,000 in year
one and allow a decrease in net working capital of $25,000 in year four. The capital
expenditure for the project will occur in year zero. What is the
project in year one?
Free Cash flow is the net amount of cash and cash equivalents in a business. Free cash flow is the amount of capital which is available for distribution. This distribution is made after meeting the depreciation,taxes, working capital and investments. Positive cash flow indicates that the firm have cash after meeting its expenses. On the other hand negative cash flow is the indication of the non generation of revenue after meeting the expenses. The equation for finding the cash flow is mentioned below:
Operating cash flow =Operating income(EBIT)+ Depreciation - Taxes + Change in working capital
OR
Free Cash flow = (EBIT *(1-tr))+D+LI+WC
Where,
EBIT = Earnings Before Interest and Tax
tr = tax rate
D = Depreciation
LI = Long term investments
WC = Working Capital
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