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FCFF = net income + non-cash charges + interest x (1 - tax rate) - long-term investments - investments in working capital

My intuition is: if the company is receiving interests payments, then the term "interest" is positive. If the company is paying out interests, the the term should be negative.

Could you please clarify this for me?

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  1. I would use EBIT*(1-T) instead of [Net Income + Int*(1-T)] (easier to remember), though they are =.
  2. The sign is in fact positive since it provides a tax shield.
  3. Also, the sign is positive b/c investors are only worried about a companies FCF, irrespective of financing decisions. One company might pay all cash, where as another might use 90% Debt.
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In the calculation of Net Income by the accountants, the interest payments made by the firm have already been subtracted. Now, in this formula, we calculate FCFF by ADDING BACK to net income a portion of the interest, namely, the Tax Shield. You can think of "interest x (1-Tax Rate)" as the subsidy that the company received from the federal government because the tax code favors debt financing over other kinds of financing.

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