Free cash flow to the firm

What the five-year plan represents

TANGE projects operating performance for five explicit years. Revenue growth moves linearly from the year-one assumption to the year-five assumption. The EBITDA margin moves linearly from the company’s historical EBITDA-to-revenue ratio to the selected fifth-year target. The plan therefore makes the transition visible instead of assuming that the long-run state exists immediately.

From EBITDA to NOPAT

Net fixed assets are a required input and form the opening asset base. Depreciation in each year is opening net fixed assets multiplied by the depreciation rate implied by the company’s own accounts, that is last year’s depreciation charge over last year’s net fixed assets. EBIT is EBITDA less depreciation, and tax is applied only to positive EBIT. NOPAT is EBIT less that operating tax.

NOPAT = EBITDA − D&A − tax on positive EBIT

Reinvestment is not optional

Depreciation is added back because it is non-cash, while maintenance capital expenditure is set equal to depreciation. Growth capital expenditure is the increase in revenue multiplied by the selected capex-per-new-revenue ratio. Net working capital is revenue multiplied by the NWC ratio, and the yearly cash outflow is its change from the preceding year.

FCFF = NOPAT + D&A − maintenance capex − growth capex − ΔNWC

Because maintenance capex equals depreciation, those two lines offset directly. The depreciation rate still affects taxable EBIT and NOPAT. Since the terminal formula starts from year-five NOPAT, much of that effect appears in terminal value.

Why the flow is unlevered

Interest, debt repayments and new borrowing do not enter the plan. The resulting cash flow belongs to all capital providers and is discounted at WACC. Financing is handled later: debt and cash are used only in the bridge from enterprise value to equity value.

From enterprise value to equity value

Enterprise value is the sum of the five discounted explicit cash flows and the discounted terminal value. It is the value of the operating business, and the bridge to equity value adjusts it for everything the operating plan does not contain. Net debt is subtracted. Surplus assets — property not used in the business, financial investments, anything whose return is not in the plan's cash flows — are added, because the discounted flows do not include them. Non-financial liabilities that net debt does not already carry — provisions for risks, employee severance, tax and litigation exposures — are subtracted. Minority interests, the share of consolidated equity belonging to third parties, are subtracted, because the flows discounted are those of the whole consolidated business. The last three are optional inputs: left empty they count as zero, which is the right answer for a company that has none of them and the wrong one for a company that does.

Equity value = enterprise value + surplus assets − net debt − non-financial liabilities − minority interests

Three of these five terms were, until this version, in the list of things the estimate declares it does not account for. They have moved from that list into the calculation. What remains outside it is the judgement about their amount, which is the user's.

Against III.1.45: the plan is a scenario, not an expected average flow

Reference is to the Exposure Draft — Principi Italiani di Valutazione 2026, Fondazione OIV, December 2025. It is a draft in consultation, not a standard in force.

III.1.45 states that discount rates obtained from CAPM, from Modigliani-Miller and from mixed methods that add specific risk premiums “provide measures of the cost of capital that can be applied only to expected average flows, not conditional on the occurrence of a specific scenario”, and requires the valuer to verify that the flows being discounted are expected average flows. It then observes that plan flows normally refer to the scenario management considers most likely, and that the most likely scenario coincides with the expected average flows only if the distribution of flows across alternative scenarios is symmetric and equiprobable.

The five-year plan this tool builds is a single scenario, and the tool does not verify that condition. The growth and margin the user enters describe one path. Nothing tests whether the distribution around it is symmetric, and nothing corrects the flow if it is not. The sensitivity table the tool shows is a measure of how far the value moves when one assumption moves, not a probability distribution of outcomes: the value shown is the user’s scenario, not its expected value.

This too is inherent to any automated calculation, not a defect of this tool. Verifying that plan flows are expected average flows means weighing the alternative scenarios and judging whether their distribution is symmetric — a judgement about a specific business and its risks, which the principle assigns to the valuer. No form can carry it out, because a form receives one path and has no access to the ones not taken. Any tool that discounts a user-entered plan with a CAPM-derived rate is in the same position; what it can do is say so.

The direction of the resulting error is knowable, and it is worth stating because it is not neutral. Where the plan entered is the optimistic case — which is the common case, since people who model their own business rarely model its disappointments — the expected average flows are necessarily lower than the plan flows, and the value shown is therefore too high. The tool opens with growth at zero for exactly this reason: any growth is something the user has asserted.