Free cash flow is calculated by adjusting net operating profit after taxes (NOPAT) with which of the following?

Free cash flow (FCF) is an important metric used in corporate finance to assess the cash that a company generates after accounting for capital expenditures necessary to maintain or expand its asset base. To calculate free cash flow, one starts with net operating profit after taxes (NOPAT), which reflects the company's operating performance after accounting for taxes.

The correct approach to arrive at the free cash flow involves adding back non-cash expenses like depreciation to NOPAT, since these expenses reduce taxable income but do not consume cash. Therefore, adding depreciation is essential in the calculation because it helps to reflect the actual cash generated by the operations.

On the other hand, capital expenditures (capex) need to be subtracted from this figure, as these expenditures represent investments in fixed assets that use cash. They reduce the available cash for stakeholders and future distributions.

So, the calculation of free cash flow essentially involves:

1. Adding depreciation expense (which is a non-cash charge) back to NOPAT to account for the true profit in terms of cash flow.

2. Subtracting capital expenditures, as these are cash outflows that need to be considered to understand how much cash is truly available after necessary reinvestment in the business.

Therefore,