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

Cutting Carbs - Divestiture in the Electrical Power Market
New answer on Apr 17, 2021
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Anonymous A asked on Apr 16, 2021

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.

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Ian
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replied on Apr 17, 2021
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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!

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Juan on Aug 18, 2021

Hey Ian, here is my thought process, still focused towards getting the most possible cash. The Revenue is also cash that we would lose, no? So in that sense, we could be effectively reducing operating cash flow by selling CoalCo, since it is profitable and maybe the highest absolute cash generator. Unless we are given any hint on whether there is an idle capacity that could be used to still sell those Ghw, divesting would imply giving away the cash from revenues. This is not considered, why?

(edited)

Ian gave the best answer

Ian

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