Invested Capital Net Cash Flows

Posted in Finance, Accounting and Economics Terms, Total Reads: 852
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Definition: Invested Capital Net Cash Flows

The cash flows from a firm which are available for payout to all its investors i.e equity holders (stockholders) as well as debt holders (lenders) after carrying out the necessary firm activities is called invested capital net cash flows. It is also known as Free Cash flows to the firm. This cash flow helps in valuing the entire business for M&A purposes and does not take into account the capital structure of the firm.


The cash flow is calculated in the following way:


Invested capital net cash flow = EBIT*(1-Tax)

+ Non cash expense (Depreciation and amortization)

- Capital expenditure

-Change in net working capital


Alternative method:

Invested capital net cash flows = Net income after tax

+ Non cash expenses

- Capital expenditure

- Change in net working capital

+ Post tax interest expense


The net cash flows obtained using the above methods is discounted by the weighted average cost of capital (WACC) of a firm over the firm’s life to obtain the value of the firm.

 

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