Unlevered fcf investopedia forex note that Macabacus no longer supports Internet Explorer versions 7 and 8. Projection Intervals Most DCF analyses use annual projection intervals.
Theoretically, the shorter the projection interval, the more accurate the DCF valuation. However, projecting smaller intervals usually requires several additional assumptions that may more than offset the additional accuracy. Most DCF analyses use 5 or 10-year projection periods. Projecting cash flows over a longer period is inherently more difficult. Unlevered Free Cash Flow Calculation The following spreadsheet shows how to calculate unlevered free cash flow. The blue inputs are hard-coded for simplicity, but would normally be linked to items on the income and cash flow statements. Income Statement and Cash Flow Items Download our operating model template to see how to project income statement items over the projection period.
The following exhibit discusses the various inputs necessary to calculate EBIT. Sales growth should converge to a long-term, sustainable rate. Projection period should extend until the business reaches steady-state. Projected profitability should be based on expectations about the future rather than historical performance. Obtain depreciation from the cash flow statement rather than the income statement. Amortization should exclude goodwill amortization per SFAS 142, unless projected EBIT also includes goodwill amortization. Non-cash working capital excludes cash and cash equivalents, short-term borrowings, and the short-term portion of long-term debt.
Non-cash working capital should be estimated by separately projecting its various components when possible. Free cash flow can be calculated in various ways, depending on audience and available data. Free cash flow may be different from net income, as free cash flow takes into account the purchase of capital goods and changes in working capital. Note that the first three lines above are calculated on the standard Statement of Cash Flows. There are two differences between net income and free cash flow. The first is the accounting for the purchase of capital goods.
Net income deducts depreciation, while the free cash flow measure uses last period’s net capital purchases. Capital investments are at the discretion of management, so spending may be sporadic. The second difference is that the free cash flow measurement adjusts changes in net working capital, where the net income approach does not. Typically, in a growing company with a 30-day collection period for receivables, a 30-day payment period for purchases, and a weekly payroll, it will require more working capital to finance the labor and profit components embedded in the growing receivables balance.