Free Cash Flow
by @linuszz
Model free cash flow to evaluate project or business value. Use for investment decisions, valuation, and understanding cash dynamics.
clawhub install free-cash-flowπ About This Skill
name: free-cash-flow description: "Model free cash flow to evaluate project or business value. Use for investment decisions, valuation, and understanding cash dynamics."
Free Cash Flow Diagram
Metadata
Instructions
You are a financial analyst modeling free cash flow for $ARGUMENTS.
Your task is to project cash flows over time and assess investment attractiveness.
Framework
Free Cash Flow Components
Revenue
Operating Expenses (OpEx)
βββββββββββββββββββββββββ
= Operating Income (EBIT)
Taxes
βββββββββββββββββββββββββ
= NOPAT (Net Operating Profit After Tax)
+ Depreciation & Amortization
Capital Expenditures (CapEx)
Change in Working Capital
βββββββββββββββββββββββββ
= Free Cash Flow (FCF)
The FCF Diagram Structure
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
β β β β β β
βββββββ΄ββββββ¬ββββ΄ββββββ¬ββββ΄ββββββ¬ββββ΄ββββββ¬ββββ΄ββββββ¬ββββ΄ββββββ
β Initial β β β β β β
β Invest β Returns β Returns β Returns β Returns β Returns β
β ($100) β +$20 β +$35 β +$50 β +$65 β +$80 β
βββββββββββββ΄ββββββββββ΄ββββββββββ΄ββββββββββ΄ββββββββββ΄ββββββββββ
β β β β β β
βββββββββββ΄ββββββββββ΄ββββββββββ΄ββββββββββ΄ββββββββββ
β
Cumulative Cash Flow
-$100 β -$80 β -$45 β +$5 β +$70 β +$150
β
Break-even: Year 3
Key Metrics
| Metric | Formula | Interpretation | |--------|---------|----------------| | NPV | Ξ£(FCF/(1+r)^t) - Initial Investment | Value created (>0 = good) | | IRR | Rate where NPV = 0 | Return percentage | | Payback | Years to recover investment | Time to break-even | | ROI | (Total FCF - Investment) / Investment | Return percentage |
Output Process
1. Define time horizon - Typically 5-10 years 2. Estimate revenue - By year, with assumptions 3. Model costs - OpEx, CapEx, working capital 4. Calculate FCF - For each year 5. Discount to present - Apply discount rate 6. Calculate metrics - NPV, IRR, payback 7. Sensitivity test - Key assumptions 8. Interpret results - Investment decision
Output Format
## Free Cash Flow Analysis: [Project/Business]Executive Summary
| Metric | Value | Assessment |
|--------|-------|------------|
| NPV | $X M | β
Positive / β Negative |
| IRR | X% | β
> WACC / β < WACC |
| Payback Period | X years | β
< Target / β > Target |
| Maximum Exposure | $X M | Capital at risk |
| Break-even Year | Year X | When cash turns positive |
Recommendation: [Invest / Do not invest / More analysis needed]
Assumptions
| Assumption | Value | Source |
|------------|-------|--------|
| Revenue CAGR | X% | [Basis] |
| Operating Margin | X% | [Basis] |
| Tax Rate | X% | [Basis] |
| Discount Rate (WACC) | X% | [Basis] |
| Working Capital % | X% | [Basis] |
| CapEx % of Revenue | X% | [Basis] |
| Terminal Growth | X% | [Basis] |
Cash Flow Projections
| Line Item | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|-----------|--------|--------|--------|--------|--------|--------|
| Revenue | - | $100 | $120 | $145 | $175 | $210 |
| - OpEx | - | ($70) | ($82) | ($97) | ($115) | ($136) |
| = EBIT | - | $30 | $38 | $48 | $60 | $74 |
| - Taxes (25%) | - | ($7.5) | ($9.5) | ($12) | ($15) | ($18.5) |
| = NOPAT | - | $22.5 | $28.5 | $36 | $45 | $55.5 |
| + D&A | - | $10 | $12 | $14 | $16 | $18 |
| - CapEx | ($50) | ($10) | ($12) | ($14) | ($16) | ($18) |
| - Ξ Working Cap | - | ($5) | ($6) | ($7) | ($8) | ($9) |
| = Free Cash Flow | ($50) | $17.5 | $22.5 | $29 | $37 | $46.5 |
Cumulative Cash Flow
| Year | FCF | Cumulative | Status |
|------|-----|------------|--------|
| 0 | ($50) | ($50) | π΄ Investment |
| 1 | $17.5 | ($32.5) | π‘ Recovery |
| 2 | $22.5 | ($10) | π‘ Near break-even |
| 3 | $29 | $19 | π’ Break-even achieved |
| 4 | $37 | $56 | π’ Profitable |
| 5 | $46.5 | $102.5 | π’ Strong returns |
Break-even Point: Between Year 2 and Year 3
Maximum Exposure: $50M (Year 0)
Valuation
Discounted Cash Flows (WACC = 10%)
| Year | FCF | Discount Factor | Present Value |
|------|-----|-----------------|---------------|
| 0 | ($50) | 1.000 | ($50.0) |
| 1 | $17.5 | 0.909 | $15.9 |
| 2 | $22.5 | 0.826 | $18.6 |
| 3 | $29 | 0.751 | $21.8 |
| 4 | $37 | 0.683 | $25.3 |
| 5 | $46.5 | 0.621 | $28.9 |
| Terminal Value | $465* | 0.621 | $288.9 |
| NPV | | | $349.4 |
*Terminal Value = Year 5 FCF Γ (1 + g) / (WACC - g) = $46.5 Γ 1.02 / (0.10 - 0.02)
Sensitivity Analysis
NPV Sensitivity to Key Assumptions
| Assumption | -20% | Base Case | +20% |
|------------|------|-----------|------|
| Revenue | $249M | $349M | $449M |
| Operating Margin | $274M | $349M | $424M |
| Discount Rate | $412M | $349M | $298M |
| Terminal Growth | $299M | $349M | $399M |
Most Sensitive To: Revenue growth
Risk Assessment
| Risk | Probability | Impact | Mitigation |
|------|-------------|--------|------------|
| Revenue shortfall | Medium | High | Conservative base case |
| Cost overruns | Low | Medium | Contingency budget |
| Delay in launch | Medium | Medium | Phased approach |
| Competition | High | High | Differentiation strategy |
Visual: Cash Flow Diagram
Legend:
βββ Returns (cash inflows)
βββ Early returns (lower)
Inv = Initial investment
Decision Criteria
| Criterion | Target | Actual | Pass? |
|-----------|--------|--------|-------|
| NPV > 0 | > $0 | $349M | β
|
| IRR > WACC | > 10% | 45% | β
|
| Payback < 4 years | < 4 yr | 2.5 yr | β
|
| Max exposure < $100M | < $100M | $50M | β
|
All criteria met: β
Recommend investment