The Modified Free Cash Flow approach uses a charge for capital employed by multiplying prior year's capital by which calculation?

The Modified Free Cash Flow approach incorporates a charge for capital employed by applying the cost of capital to the previous year's capital investment. This concept reflects the opportunity cost of using equity and debt to finance the company's operations. The correct calculation involves determining how much return investors expect based on the capital they have provided to the business, which is represented by the cost of capital.

Using the cost of capital allows the calculation to account for both equity and debt financing. Essentially, it provides a benchmark against which the company's performance can be measured. If the return generated by the business exceeds the cost of capital, it indicates that the company is generating value for its stakeholders.

In contrast, the other options do not represent a cost associated with capital employed. Current liabilities do not provide a basis for understanding the return on capital; net income reflects profitability rather than capital costs; and operational cash flow can indicate the company's cash-generating ability, but it does not directly relate to the cost of capital or the capital charge itself.