Question

1. When we calculate a project or firm's free cash flow, should we subtract cash spent on necessary capital expenditures (CAPEX)? Why or why not?

2. When we calculate a project or firm's free cash flow, should we subtract interest payments? Why or why not?

Answer 1

1. We should subtract cash spent on capital expenditure while calculating free cash flow to firm because it is an actual cash expenditure which decreases the cash available with firm and also does not appear on the income statement.

2. We should not subtract interest payment because interest is a cash flow available to one of the company's capital providers. It neutralizes the cost of debt, as well as the effect interest payments, have on taxes . This increases the cash flow available to the firm due to the tax savings .