What is Free Cash Flow? Free cash flow is a cash flow available in a company after paying operating expenses, debt and other obligations. It does not include the non cash expenses like depreciation. Formula: FCF =Net income + Depreciation + Interest expense*(1-tax rate)-Increase in net working capital-Capital expenditure . OR FCF =EBIT*(1-tax rate) + Depreciation-Increase in net working capital/+Decrease in net working capital-Capital expenditure Where, FCF=Free Cash Flow, EBIT = Earnings before Interest and Tax Capital expenditure = Cost of Asset Example: The LX Company wants to purchase a machine worth Rs. 90,000. The life of asset is 5 years and the salvage value is Rs. 2800. The increase in net working capital is Rs. 45,820.The earnings before interest and tax is Rs. 4, 50,000. The company tax rate is 35%. What is the free cash flow of a LX Company? Solution: Depreciation on machine: = (Cost of machine-Salvage value)/Useful life of machine
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