Calculate free cash flow for 2014 for Monarch Textiles. Assume all current liabi

Question

Calculate free cash flow for 2014 for Monarch Textiles. Assume all current liabilities are non-interest bearing liabilities and that no fixed assets were dsiposed of during 2014.

Formula in book: Free Cash Flow = EBIT(1-Tax rate) + Depreciation – Cap Expend. – Working Capital Invest.

I know that EBIT = $250

Tax rate = .4

Depreciation = 50

Capital Expenditures??

Working Capital Invested???

I have seen answers ranging from -20 - 450! So please someone help, with the right answer!

Monarch Textiles, Inc. (S thousands) Income statement Selected balance sheet items 2014 1,100 700 100 50 50 200 80 120 2013 2014 Sales Cost of sales Operating expenses Depreciation Interest expense Earnings before taxes Tax Net income Current assets Net fixed assets 300 400 100 200 Current liabilities 200 280

Explanation / Answer

Free cash flow = EBIT (1 - Tax rate) + Depreciation - Capital expenditure - Working capital investment

Capital expenditures includes purchase of fixed assets, in this the net fixed assets are increased from $100 to $200 in years 2013 and 2014 so there is a purchase of fixed assets 2014 worth of $100 ($200 - $100).

Working capital investments include any investments which are made to operate the business and form part of current assets.There is an increase in current assets from $300 to $400 in years 2013 and 2014 so there is an investment of $100 ($400 - $300) in working capital.

So free cash flows = $250 (1-0.40) + $50 - $100 - $100

= $150 + $50 - ($200)

= $200 - $200

= $0.

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