Page 1 of 6 FIN401 ADVANCED FINANCIAL MANAGEMENT NOTE: CAPITAL BUDGETING AND FREE CASH FLOWS Computing Free Cash Flows Capital Budgeting requires a forecast of Free Cash Flows (FCF), which are then used to measure the Internal Rate of Return (IRR) and Net Present Value (NPV) of a project. In addition, the IRR is also compared to the Weighted Average Cost of Capital (WACC) to determine the viability of the project. Free Cash Flows represent the cash that is generated from the operations of a business. The calculation of Free Cash Flows uses the same techniques as used in the generation of a Statement of Cash Flows. From a high-level perspective, Free Cash Flows are calculated from the first two sections of the Statement of Cash Flows: Cash from Operating Activities Cash from Investing Activities The third section of a Statement of Cash Flows, Cash from Financing Activities, is not included, as it measures how a company finances its business operation and not the business operation itself. Both the Income Statement and Balance Sheet are required to calculate the Free Cash Flows. To create an Excel schedule of Free Cash Flows, we will start with the Income