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17 November, 10:35

Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions

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  1. 17 November, 12:15
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    Free cash flow = $2.25 million.

    Explanation:

    We know,

    Free cash flow = Operating income * (1 - tax rate) + depreciation - net working capital.

    Given,

    free cash flow = ?

    Operating income = $2.75 million

    tax rate = 40%.

    depreciation = $1.20 million.

    net working capital = $0.6 million.

    Putting the values into the formula, we can get

    Free cash flow = [Operating income * (1 - tax rate) + depreciation - net working capital] million.

    Free cash flow = [$2.75 * (1 - 40%) + $1.20 - $0.6] million.

    Free cash flow = ($2.75 * 0.6 + $1.20 - $0.6) million.

    Free cash flow = ($1.65 + $1.20 - $0.6) million.

    Free cash flow = ($2.85 - $0.6) million.

    Free cash flow = $2.25 million.
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