This workout asks us to calculate the free cash flows in year one. Remember that free cash flow is the cash available to all providers of Finance. So equity and debt providers. For that reason, we start our calculation with EBIT. In this case EBIT is equal to operating profit as we don't see any non-recurring items we would need to adjust for.

Next we need to deduct tax from that EBIT. So we apply the tax rate of 20% and I'm going to make that a negative because we're going to be deducting it.

That then gives us NOPAT or net operating profit after taxes. Otherwise known as EBIAT earnings before interest after taxes. Now that is a profit figure and we want a cash figure. So we need to look to the balance sheet to pick up the cash flows.

The first one we have here is change in operating assets. If we have a look in row 13, we can see that operating assets have increased from year zero to year one. And that would reflect a cash outflow. imagine that we're inventory I've invested in more inventory. And so I would expect to see a negative here.

In order to make sure we get the sign correct, we're going to take last year's balance minus this year's balance. And that correctly shows a cash outflow of 2.8.

Changing operating liabilities works the opposite way. If we see an increase in operating liabilities, which is what we see here that reflects a cash inflow. Imagine that with payables I have used more credit and therefore I've preserved cash. So we are going to take this year's balance minus last year's balance. And that will correctly flow through as a cash inflow.

Change in long-term assets works the same way as operating assets. So we're going to take last year's long-term balance minus this year's balance to give us a cash outflow of 23.2.

The last thing we need to do is sum up NOPAT and the cash flows. Take care. We're not going to go all the way back up to the top to even because we already have the subtotal NOPAT. So I take NOPAT and cash flows and that gives me a free cash flow of 195.54 year one.