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Is this included when computing free cash flows for a project? Explain why it is or...

Is this included when computing free cash flows for a project? Explain why it is or isn't.

Changes in current asset/current liabilities accounts

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Answer #1

Free cashflow is calculated as -

Net Profit
Add- Depreciation
Less/Add- Change in working capital
Less/Add- capital expenditure
Free cashflow

Changes in current asset/current liabilities accounts is included when computing free cash flows for a project

Reason- Changes in current asset and current liabilities have impact on cash inflow and outflow of the project, hence its been included in it. Increase in current asset represents an outflow of cash and decrease in current assets represents and inflow of cash. increase in current liabilites represents an inflow of cash whereas decrease in current liabilities represents and outflow of cash. Thus it should be included in free cash flow

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