6. You are trying to estimate the free cash flow to the firm on January 1, 2010,

Question

6. You are trying to estimate the free cash flow to the firm on January 1, 2010, for a software company and have been provided with the following information for 2009 (all numbers in millions):

You are also given the following information:

a. The firm invested $180 million in property, plant and equipment in 2009.

b. The firm’s R&D generally takes an average of 4 years to pay off; its R&D expenses were $40 million in 2005, $80 million in 2006, $ 120 million in 2007 and $ 160 million in 2008.

c. Total working capital (including cash) increased by $ 10 million last year but the cash balance decreased by $ 20 million. The firm has no short-­?term debt.

Estimate the free cash flow to the firm in 2009.

800 $100 $ 200 $ 200 $300 $ 50 $250 100 150 Revenues -Depreciation & Amortization -R & D expenses Other operating expenses Operating income Interest expenses Taxable income Taxes paid Net Income

Explanation / Answer

Estimation of free cash flow to the firm on January 1, 2010 Particulars Amount Revenues $                800 R&D Expenses $               (200) Other Operating expense $               (200) Other Operating income $                300 Interest Expenses $                 (50) Taxpaid $               (100) Plant and Equipmet $               (180) Free Cash flow chang before working capital change $                370 Working Capital Change $                  30 Free Cash flow change after working capital change $                400 Working Capital Change $                  10 Add:- Decreasing Cash flow $                  20 $                  30

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