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Sweeter Enterprises Inc. has cash flows from operating activities of $438,000. Cash flows used for investments...

Sweeter Enterprises Inc. has cash flows from operating activities of $438,000. Cash flows used for investments in property, plant, and equipment totaled $92,000, of which 70% of this investment was used to replace existing capacity. a. Determine the free cash flow for Sweeter Enterprises Inc. $ b. How might a lender use free cash flow to determine whether or not to give Sweeter Enterprises Inc. a loan? Free cash flow is often used to measure the financial strength of a business. The free cash flow that a business has, the easier it will be for the company to pay the interest on the loan and repay the loan principal. Sweeter’s free cash flow is $ , which is very .

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Expert Solution

Solution:
a. Free cash flow for Sweeter Enterprises Inc. $373,600
Working Notes:
Notes PPE = Property plant and equipment
Cash flows from investments in PPE $92,000 A
Replacement percentage 70% B
Cash paid for maintaining PPE $64,400 C= A x B
Cash flows from operating activities $438,000 D
Less: Cash paid for maintaining PPE $64,400 E=C above
Free Cash flow $373,600 F= D-C
b. Free cash flow is often used to measure the financial strength of a business. The free cash flow that a business has, the easier it will be for the company to pay the interest on the loan and repay the loan principal. Sweeter’s free cash flow is $373,600 , which is very strong
Working Notes:
Cash flows used for investments in PPE $92,000
Cash paid for maintaining PPE $64,400
Free cash flow available is 373,600
which is much more , hence its very strong
Please feel free to ask if anything about above solution in comment section of the question.

ekkarill92 answered 1 year ago
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