Free Cash Flow and Net Present Value
Free cash flow (FCF) reveals the amount of cash remaining after a firm covers its capital expenditures (e.g., procuring equipment or upgrading facilities). Incremental cash flow comprise the net increase or decrease in a firm’s cash flow generates from accepting a new project or investment. Net present value (NPV) is the value in the present of a sum of money, in comparison to some future value it will have when it has been invested at compound interest.
Updated 24 June, 2025.
Free Cash Flow Calculation
Free Cash Flow = (Revenue – Costs – Depreciation) x (1- tax) + Depreciation – Capital Expenditure (CapEX) – Change in Net Working Capital (NWC)
Capital Expenditure (CapEX)
CapEX is a financial outlay (expenditure) a firm makes to acquire, upgrade, or maintain long-term assets, such as property, buildings, equipment, and machinery, that create benefits lasting more than one year.
Net Working Capital (NWC)
NWC measures a firm’s short-term financial health by comparing its current assets to its current liabilities. A positive NWC shows a firm has adequate liquid resources to cover its immediate debts, while negative NWC indicates potential liquidity difficulties and an inability to meet short-term financial obligations.
NWC = Current Assets – Current Liabilities
Net Present Value
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