Free Cash Flow You are considering an investment in Cruise, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Cruise earned an EBIT of $202 million, paid taxes of $51 million, and its depreciation expense was $75 million. Cruise's gross fixed assets increased by $70 million from 2007 to 2008. The firm's current assets decreased by $10 million and spontaneous current liabilities increased by $6 million. What is Cruise's operating cash flow, investment in operating capital, and free cash flow for 2008, respectively, in millions?
A) $202, $70, $130
B) $226, $70, $156
C) $226, $54, $172
D) $226, $74, $152

Question

Quizplus · Accepted Answer

Operating cash flow = EBIT - Taxes + Depreciation
= $202 million - $51 million + $75 million
= $226 million

Investment in operating capital = Increase in gross fixed assets + Changes in current assets - Changes in spontaneous current liabilities
= $70 million + (-$10 million) - $6 million
= $54 million

Free cash flow = Operating cash flow - Investment in operating capital
= $226 million - $54 million
= $172 million

Therefore, the best choice is C, where the operating cash flow is $226 million, investment in operating capital is $54 million, and free cash flow is $172 million.

Free Cash Flow You Are Considering an Investment in Cruise