Question

Discuss the types of investments that should be included FCF calculations. Provide examples

Answer 1

Free cash flow is calculated using following formula:

Free cash flow = NOPAT + Depreciation – Capex – Change in working capital

Where, NOPAT is net operating income in current period after tax.

Depreciation is non cash expenses.

Capex or capital expenditure is the investment that company make for purchase of new property, equipment and plant. these investment is considered as long term investment. So, all long term investment made by company in current year must be included FCF calculations.

Change in working capital is type of short term investment that company make in current year.