Calculate the second coffee shop's FCF, its NPV with the investment outside the NPV function, and its IRR, and check the NPV a second way.
From profit to cash and NPV
From profit to cash and NPV
Profit isn't cash yet (lesson 2.3). The second location's model has a single capital expenditure — 120 at the start of 2027 — and we don't forecast an increase in working capital. So FCF = NOPAT + depreciation: depreciation reduced EBIT but took no cash. Cash flows after 2031 and the location's terminal value aren't counted: the horizon is 5 years, a conservative valuation.
Worked example — FCF for 2028: NOPAT 32.4 + depreciation 24 = 56.4. In 2027 NOPAT is lower, 9.72, because first-year traffic is 80 orders.
On the sheet, the investment sits in the “Start of 2027” column with a minus sign, and the 2027–2031 cash flows are to the right. The valuation follows lesson 4.2: NPV discounts the first cash flow of its range by a year, so only FCF 2027–2031 goes inside it, and the investment is subtracted outside. The rate is 15%. NPV = NPV(15%, FCF) − 120 = 49.34. IRR, by contrast, takes the whole series with the investment: ≈ 29.97%, above the rate.
To trust the number, calculate it a second way: factor = 1 / (1 + rate)^year number, discounted cash flow = FCF × factor, NPV = sum of discounted cash flows − investment. A flag compares the two NPVs by their difference, as in lesson 1.3: ABS(B12 − B13) < 0.01. Exact equality of decimals can fail because of rounding.
The second location's cash flows, $ thousands
| Year | NOPAT | Depreciation | FCF |
|---|---|---|---|
| Start of 2027 | — | — | −120 |
| 2027 | 9.72 | 24 | 33.72 |
| 2028–2031, each year | 32.4 | 24 | 56.4 |
Lesson notes
From profit to cash and NPV
Profit isn't cash yet (lesson 2.3). The second location's model has a single capital expenditure — 120 at the start of 2027 — and we don't forecast an increase in working capital. So FCF = NOPAT + depreciation: depreciation reduced EBIT but took no cash. Cash flows after 2031 and the location's terminal value aren't counted: the horizon is 5 years, a conservative valuation.
Worked example — FCF for 2028: NOPAT 32.4 + depreciation 24 = 56.4. In 2027 NOPAT is lower, 9.72, because first-year traffic is 80 orders.
On the sheet, the investment sits in the “Start of 2027” column with a minus sign, and the 2027–2031 cash flows are to the right. The valuation follows lesson 4.2: NPV discounts the first cash flow of its range by a year, so only FCF 2027–2031 goes inside it, and the investment is subtracted outside. The rate is 15%. NPV = NPV(15%, FCF) − 120 = 49.34. IRR, by contrast, takes the whole series with the investment: ≈ 29.97%, above the rate.
To trust the number, calculate it a second way: factor = 1 / (1 + rate)^year number, discounted cash flow = FCF × factor, NPV = sum of discounted cash flows − investment. A flag compares the two NPVs by their difference, as in lesson 1.3: ABS(B12 − B13) < 0.01. Exact equality of decimals can fail because of rounding.