1. Free cash flow starts with operating income. 2. To that you add back depreciation and other noncash expenses. 3. This gives you cash from operations. 4. We must then calculate the investment in working capital and the investment in plant property and equipment. 5. To get the investment in working capital you take all increases in the current asset accounts as a use of cash and all decreases in current asset accounts as sources of cash. For operating current liabilities it works in reverse, all increases in the current liability accounts are a source of cash and all decreases in current liabilities are a use of cash. 6. Capital expenditures on plant property and equipment can be found on the investing section of the cash flow statement (or for class purposes it will be given). 7. Free cash flow = operating income + depreciation – incremental investment in working capital – capital expenditiures on plant property and equipment (long term assets) Sample Balance Sheet data: Beginning Ending Source or (Use) Cash 20 30 Use -- 10 Account Receivables 40 30 Source-- 10 Inventory 60 80 Use – 20 Accounts payable 40 50 Source – 10 Accrued expenses 25 20 Use -- 5 Using the information immediately above, the incremental investment in working capital is a net incremental investment of 35 use – 20 source = 15 (net use of cash or net incremental investment in working capital)…………………………… 15 Given an investment in Plant property and Equipment ,………………………….. 50 The total investment in operating assets for the period is …………………………… 65 Additional sample income statement data: NOPLAT…………………………………………………………………… 89.2 Depreciation and noncash expenses………………………………. 5.8 Using the data ), please calculate free cash flow.