Question

Free cash flow

McMahon Inc. reported the following on the company’s statement of cash flows in 2014 and 2013:

Seventy percent of the net cash flow used for investing activities was used to replace existing capacity.

a. Determine McMahon’s free cash flow for both years.

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b. Has McMahon’s free cash flow improved or declined from 2013 to 2014?

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Dillin Inc. reported the following on the company’s statement of cash flows in 2014 and 2013:

Eighty percent of the net cash flow used for investing activities was used to replace existing capacity.

a. Determine Dillin’s free cash flow for both years.

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b. Has Dillin’s free cash flow improved or declined from 2013 to 2014?

Answer 1

A) a.

McMahon Inc.

Cash Flow Statement

Particulars	Amount ($)
	2014	2013
Net cash flow from operating activities	294,000	280,000
Less:
Investment in fixed assets to maintain current production:
($ 224,000 × 70%)	156,800
($ 252,000 × 70%)		176,400
	--------------	--------------
Free Cash flow	137,200	103,600
	========	========

A) b.

McMahon’s free cash flow was improved from 2013 to 2014.

B) a.

Dillin Inc.

Cash Flow Statement

Particulars	Amount ($)
	2014	2013
Net cash flow from operating activities	476,000	455,000
Less:
Investment in fixed assets to maintain current production:
($ 427,000 × 80%)	341,600
($ 378,000 × 80%)		302,400
	--------------	--------------
Free Cash flow	134,400	152,600
	========	========

B) b.

Dillin’s free cash flow was declined from 2013 to 2014.