Why are the operating costs considered as increasing cashflow 1:1? (and why are revenues not considered?)

Question

In the case, it is assumed, that selling CoalCo will result in an increase in Free Cash Flow of 2.695 Billion. Why are the revenues generated through selling the power from CoalCo not considered in this calculation?

My intention was to calculte Operative Cashflow first: (Revenues of CoalCo - Operation Costs of CoalCo. Therefrom, it could be followed how much cash the company generates or bruns on a yearly bases through operating CoalCo).

Subsequently, I would have used this number to calculate the present value of the cashflows associated with operating CoalCo.

Answer 1

Hi there,

This is a great question and a fair point! I would recommend including this in your risks bucket in your final recommendation.

However, please never forget that in every single case, you need to focus on (and only on) the objective.

"Recently, the CEO has embarked on an initiative to return to the core of the business. She is looking to increase free cash flow and cash reserves in order to prepare the business for evolving future trends."

Our goal here is to cut costs and free up cash. As such, we have to cut the biggest "drag" on our company.

Never forget the objective!