EX 16-26 Free cash flow

Lovato Motors Inc. has cash flows from operating activities of $720,000. Cash flows used for investments in property, plant, and equipment totaled $440,000, of which 85% of this investment was used to replace existing capacity.

Determine the free cash flow for Lovato Motors Inc.


Answer:

Cash flows from investment in PPE…………………………………………… $440,000
Replacement percentage…………………………………………………………… 85%
Cash paid for maintaining PPE…………………………………………………… $374,000
Net cash flow from operating activities………………………………………… $720,000
Less investments in fixed assets to maintain current
production…………………………………………………………………………… 374,000
Free cash flow………………………………………………………………………… $346,000