Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million. Crew Cut's gross fixed assets increased by $10 million from 2007 to 2008. The firm's current assets increased by $6 million and spontaneous current liabilities increased by $4 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions?
A) $23, $10, $13
B) $23, $12, $11
C) $27, $10, $17
D) $27, $12, $15

Question

Quizplus · Accepted Answer

Operating Cash Flow = EBIT - Taxes + Depreciation
= $23 million - $4 million + $8 million
= $27 million

Investment in Operating Capital = Increase in Current Assets - Increase in Current Liabilities
= $6 million - $4 million
= $2 million

Free Cash Flow = Operating Cash Flow - Investment in Operating Capital
= $27 million - $2 million
= $25 million

Therefore, the correct option is D, with operating cash flow of $27 million, investment in operating capital of $12 million, and free cash flow of $15 million.

Free Cash Flow You Are Considering an Investment in Crew