Skill: linuszz/free-cash-flow (version 1.0.0)

--- 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 - **Name**: free-cash-flow - **Description**: Cash flow modeling for investment and valuation analysis - **Triggers**: free cash flow, FCF, cash flow, NPV, break-even, investment analysis ## 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) ───────────────────────── = Operating Income (EBIT) - Taxes ───────────────────────── = NOPAT (Net Operating Profit After Tax) + Depreciation & Amortization - Capital Expenditures (CapEx) - Change in Working Capital ───────────────────────── = Free Cash Flow (FCF) ``` ### The FCF Diagram Structure ``` Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 │ │ │ │ │ │ ┌─────┴─────┬───┴─────┬───┴─────┬───┴─────┬───┴─────┬───┴─────┐ │ Initial │ │ │ │ │ │ │ Invest │ Returns │ Returns │ Returns │ Returns │ Returns │ │ ($100) │ +$20 │ +$35 │ +$50 │ +$65 │ +$80 │ └───────────┴─────────┴─────────┴─────────┴─────────┴─────────┘ │ │ │ │ │ │ └─────────┴─────────┴─────────┴─────────┴─────────┘ │ Cumulative Cash Flow -$100 → -$80 → -$45 → +$5 → +$70 → +$150 │ Break-even: Year 3 ``` ### Key Metrics | Metric | Formula | Interpretation | |--------|---------|----------------| | **NPV** | Σ(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 | ✅ Positive / ❌ Negative | | IRR | X% | ✅ > WACC / ❌ < WACC | | Payback Period | X years | ✅ < Target / ❌ > 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) | | - Δ 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) | 🔴 Investment | | 1 | $17.5 | ($32.5) | 🟡 Recovery | | 2 | $22.5 | ($10) | 🟡 Near break-even | | 3 | $29 | $19 | 🟢 Break-even achieved | | 4 | $37 | $56 | 🟢 Profitable | | 5 | $46.5 | $102.5 | 🟢 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 × (1 + g) / (WACC - g) = $46.5 × 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 ``` ($50) ───────────────────────────────────────────────────── │ │ │ │ │ │ │ ▼ ▼ ▼ ▼ ▼ ▼ ▼ ┌────┬─────────┬─────────┬─────────┬─────────┬─────────┬─────┐ │ │ ░░░░░░░ │ ░░░░░░░ │ ▓▓▓▓▓▓▓ │ ▓▓▓▓▓▓▓ │ ▓▓▓▓▓▓▓ │ │ │Inv │ Returns │ Returns │ Returns │ Returns │ Returns │ TV │ └────┴─────────┴─────────┴─────────┴─────────┴─────────┴─────┘ Y0 Y1 Y2 Y3 Y4 Y5 │ Break-even (Year 2-3) ``` **Legend:** - ▓▓▓ Returns (cash inflows) - ░░░ Early returns (lower) - Inv = Initial investment --- ### Decision Criteria | Criterion | Target | Actual | Pass? | |-----------|--------|--------|-------| | NPV > 0 | > $0 | $349M | ✅ | | IRR > WACC | > 10% | 45% | ✅ | | Payback < 4 years | < 4 yr | 2.5 yr | ✅ | | Max exposure < $100M | < $100M | $50M | ✅ | **All criteria met:** ✅ Recommend investment ``` ## Tips - Be conservative on revenue, realistic on costs - Terminal value often dominates - scrutinize carefully - Use sensitivity analysis to identify key assumptions - Show both undiscounted and discounted cash flows - Payback ignores time value of money - use as secondary metric - Consider multiple scenarios (base, optimistic, pessimistic) - The diagram should tell the story at a glance ## References - Brealey, Myers, Allen. *Principles of Corporate Finance*. Multiple editions. - Copeland, Koller, Murrin. *Valuation*. 1994. - Damodaran, Aswath. *Investment Valuation*. 2012.


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