Estimating FCFF short problem

[MrSmart]

This is from the book Investment Valuation:

You are trying to estimate the free cash flow to the firm for RevTech, a technology firm. The firm reported $80 million in earnings before interest and taxes, capital expenditures of $30 million, and depreciation of $20 million in the most recent year. There are two additional complications:

• The firm had R&D expenses of $50 million in the most recent year. You believe that a three-year amortizable life is appropriate for this firm and the R&D expenses for the past three years have amounted to $20 million, $30 million, and $40 million respectively.
• The firm also made two acquisitions during the year—a cash-based acquisition for $45 million and a stock-based acquisition for $35 million.
  If the firm has no working capital requirements and a tax rate of 40%, estimate the free cash flow to the firm in the most recent year.

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?

[S2000magician]

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).

[MrSmart]

@S2000magician

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?