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In a few sentences: When we calculate a project or firm's free cash flow, should we...

In a few sentences: When we calculate a project or firm's free cash flow, should we subtract cash spent on necessary capital expenditures (CAPEX)? Why or why not?

Solutions

Expert Solution

Yes

Free cashflow formula=EBIT*(1-tax rate)+depreciation-capex-increase in working capital.

Free cashflows are the cashflows that is left over after meeting the companies capex requirements both in asset building and working capital.

If the free cashflows are not sufficient to meet the capex , company will goes for other sources of funding like debt, raising new equity etc.,

jeff jeffy answered 2 years ago
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