Worked example, Regional Logistics Corp Year 1: EBITDA $80m, D&A $25m, Capex $30m, ΔWC −$5m, cash taxes $12m, mandatory amortization $10m. Calculate CFADR.
Starting data:
- EBITDA: $80m
- Cash taxes: $12m
- Capex: $30m
- ΔWC: −$5m (cash inflow, because WC declines)
- Mandatory amortization: $10m
Calculation:
```
CFADR = EBITDA − cash taxes − Capex − ΔWC − amortization
= $80 − $12 − $30 − (−$5) − $10 = $33m
```
$33m of cash for the Cash Sweep — against $200m of Senior Debt that equals a 16.5% amortization rate, a solid range for a middle-market LBO.
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The convention is tricky and junior modelers often stumble here:
- ΔWC = increase (positive number): more cash is tied up in operating working capital → cash out, subtract as usual.
- ΔWC = decrease (negative number): WC declines, cash is freed up → cash inflow, and subtracting it turns into a plus.
In the case above, ΔWC = −$5m means WC fell by $5m, so $5m flowed back into cash. In the formula: − (−$5) = + $5.
D&A. It is non-cash, so it is irrelevant to the cash calculation. On the path via NOPAT you would first subtract D&A (for the tax base), then add it back — net effect zero.
Question: "Why does ΔWC show up in the model sometimes with a plus, sometimes with a minus?"
Answer: "A ΔWC increase is a cash out (more WC ties up cash), a ΔWC decrease is a cash inflow (WC release frees up cash). In the calculation ΔWC is always subtracted — a negative ΔWC becomes, through the minus, a positive effect on CFADR. The clean path is: EBITDA − cash taxes − Capex − ΔWC − amortization"