Question

It is often stated that free cash flow is the same as economic profit. Define free cash flow. Demonstrate whether it is or is not the same as economic profit.

Answer 1

Free Cash flow : It is a measurement of a company's financial performance . It is operating cash flow minus capital expenditures .

While economic profit is the difference between the revenue earned from the sale of an output and the opportunity cost of the inputs used . In calculating economic profit, opportunity costs are deducted from revenues earned . Opportunity costs are the alternatives forgone .

Both concepts are very different . FCF does not consider any opportunity costs , it is the cash that the company generates after spending on required amount to maintain asset base .