# Estimating FCFF short problem

This is from the book Investment Valuation:

The way I solved it is: NOPAT of 80(0.6) = \$48 subtract net Capex of 10 = \$38 add back depreciation of 20 = \$58 subtract cash based acquisition of 45 = \$13 million FCFF The answer however is way off. There is something about R&D that’s distorting the calculation, I’m assuming that we should capitalize R&D and build an amoritization schedule, but that should not affect free cash flow in the end. Thoughts?

In the problem statement you have capex at \$30 million, but in your solution you have it at \$10 million. Is one of those a typo?

As to the R&D: if they had expenses of \$50 million last year, but their average over the past 3 years is \$30 million (= (\$20 million + \$30 million + \$40 million) / 3) and they expect that average to hold in the foreseeable future, then their \$80 million EBIT is too low by \$20 million (= \$50 million – \$30 million).

It’s not a typo, I’m assuming that \$30 is gross capex? If not, then it’s \$20 less than \$13 giving -\$7. Still far off from the answer (which was -4x.xx).

R&D can be capitalized and amortized like you say, but that shouldn’t affect FCFF. Since R&D expense is fully tax deductible for the year, and it’s a current cash expense. I’m assuming stock based acquisitions should be counted towards capex as well?

Damodaran writes great literature, but his questions are spastic.

EDIT: It seems like Capex here was net after all, and if you include in stock-based acquisition of 35\$, it gives you the correct answer of -\$42. But shouldn’t stock based acquistions leave FCFF unchanged?