CFA CFA Level 2 fixed capital investment and FCFF

# fixed capital investment and FCFF

• Author
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• googs1484
Participant
• CFA Level 3
1
Question 25 (1 of 6)
Mark

Based on Exhibits 1 and 2, the estimated free cash flow (\$ thousands) for AI in 2017 is closest to

1. 280.7

2. 512.2

3. 385.1

## Solution

Free cash flow (FCF) = Net operating profit less adjusted taxes (NOPLAT) + Depreciation â€“ Change in net working capital â€“ Capital expenditures

NOPLAT = Net income + After-tax interest + Change in deferred taxes

NOPLAT = 625 + 59 x(1-0.2) + 0 = 672.2

FCF = 672.2 + 160 â€“ [(2,150-1,680)-(2,100-1,650)] â€“ (22,800-22,500) = \$512.2

• googs1484
Participant
• CFA Level 3
3

@pauladaptprep I am usually pretty good with this stuff so this is bothering me but I think the answer here is wrong from your question bank. You took the change in NET capital fixed investment which already includes the effects of depreciation in FCF. By you adding back depreciation on top of the delta of net FCinv you are double counting. Did not you over state FCF here by 160?