Question

How can FCF in the terminal year of a project’s life differ from FCF in the other years? Provide an example.

Answer 1

The free cash flow is the cash flow one would expect from the investment year on year basis. It is one of the important concept in capital budgeting and very difficult to forecast. A terminal year is the last year of the investment. It is last economic life or year of an investment. FCF would be difficult in this year as lots of calculation needs to be made in this year than other's years. In the last year, FCF would be affected mostly as several other costs specific to this year needs to be incurred such as scrapping cost or dismentaling costs. These would will eat out the free FCF in this year.