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.
By Pedro Clifford
Free Cash Flow & NPV 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
