Free cash flow (FCF) and net income (NI) differ in the following ways: I) Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated before interest.

II) Net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation.

III) Capital expenditures and investments in working capital do not appear in net income calculations; however, they do reduce free cash flows.

IV) Net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments can exceed cash flows from operations.

a.

I only

b.

I and II only

c.

I, II, and III only

d.

I, II, III, and IV