CHAPTER 4

Cash flow and Financial Planning

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 Free Cash Flow (FCF)
• FCF is the amount of cash that could be withdrawn
from a firm without harming it’s ability to operate and
to produce future cash flow.
• FCF =OCF - Net fixed asset investment (NFAI)- Net
current asset investment (NCAI)
• FCF = OCF – Capital expenditure-Increase in NWC)
• Net fixed asset investment (NFAI)=Capital
Expenditure
• Net current asset investment (NCAI)=Increase in
NWC
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 Operating Cash flow (OCF)
• Cash flow generated from its normal operations
• OCF = NOPAT + Depreciation
• Net Operating Profit After Tax(NOPAT)=EBIT(1-T)
• So, OCF= EBIT(1-T)+Depreciation

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 Free Cash Flow
• Capital Expenditure = Change in Long-term assets

• NFAI = Change in net fixed assets + Depreciation

Or

NFAI = Change in gross fixed assets

• NCAI = Change in current assets - Change in
(accounts payable + accruals)

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1.Calculate the firm’s NOPAT for the year
ended December 31, 2012

2.Calculate the firm’s OCF for the year

ended December31, 2012,

3.Calculate the firm’s FCF for the year

ended December 31, 2012

4. Interpret, compare, and contrast your

cash flow estimates in 2 and 3.

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