Question

3. Starting with management's NOPAT projections in case Exhibit 17, what do you estimate as the free cash flow for 2010 through 2015? How do these cash flows compared with those based on the market scenario given in case Exhibit 18?

Exhibit 17

Exhibit 18

Answer 1

Free cash flow is the cash which a company produces through its operations, deducted by the cost incurred in assets.

Free Cash flow = (EBIT - taxes) + Depreciation and Amoritsation - Capital Expenditure - Change in Working Capital

Free cash flow of firm through the years 2010-2015 are mentioned below:

1. Year 2010: (334.4 + 288.1) = $622.50

2. Year 2011: $ 989.1

3. Year 2012: $ 1190.1

4. Year 2013: $ 1594.1

5. Year 2014: $ 2041.9

6. Year 2015: $ 2305.7

Average free cash flows = $ 1457.23

Similarly, free cash flows for market are:

1. Year 2010: $ 605.4

2. Year 2011: $ 950.3

3. Year 2012: $ 1196.4

4. Year 2013: $ 1413.8

5. Year 2014: $ 1645.6

6. Year 2015: $ 1764.9

Average free cash flows = $ 1262.73

On comparison, we can observe that the free cash flows of the organisation are higher than the free cash flows under market scenario.

No information regarding "capital exp." and "working capital" has been given in the question. Hence the same have not been considered while answering the question.