The project IRR takes as its inflows the full amount(s) of money that are needed in the

project. The outflows are the cash generated by the project. The IRR is the internal rate of
return of these cash flows. The calculation assumes that no debt is used for the project.

Equity IRR assumes that you use debt for the project, so the inflows are the cash flows
required minus any debt that was raised for the project. The outflows are cash flows from the
project minus any interest and debt repayments. Hence, equity IRR is essentially the
"leveraged" version of project IRR.

I am assuming that your net income is calculated after interest expense. I would
calculate FCFE as follows:

Net Income + Depr. -(+) increase (decrease) in working capital - cap ex. -- do not
make any adjustment for loan repayment at this time.

Further, I would discount the FCFE and terminal value using a cost of equity and
not wacc.

Once you have the pv of FCFE and terminal value, add them together and deduct
the total loan amount to get to total equity value

Before debating more deeply. I want to ask what are you trying to value ? A
project valuation, or Equity Valuation ?.

I assume that you are trying to value a project with detailed 20 yrs cash flow. If
you are trying to value a project (a corporation investment decision) then the most
common sense on the terminal value ( the end of the project ) must be a
liquidation value (the value you sale all the asset of your project), and not by
using the going concern assumption.

Why.. because every project has age. Impossible for a project with a single time
investment will have a going concern value on perpetuity basis for the next
century.

This will be different if you are try to value equity/stock.

my Advice change the terminal value by liquidation value ( your estimate of

market value of each asset of your project at the end of the project ).

Calculating FCFF and FCFE

Free cash flow to firm is the cash available to bond holders and stock holders after all
expense and investments have taken place. FCFE is the cash available to stock holders after
all expense, investments and interest payments to debt-holders on an after tax basis.

Here are some formulas and some explanation.

NCC= non cash charges such as depreciation and amortization.

NI = Net income.
Int(1-t) = after tax interest expense.
FCinv = change in fixed capital investments.
WCinv = change in working capital investments.
CFO = cash flow from operations.

FCFF = NI + NCC + Int(1-T) - FCinv - WCinv. Net income includes the interest paid to the
company’s bondholders, but the definition of FCFF is the cash available to the firm’s
bondholders and equity holders. So it is the money before paying the interest, thus, we need
to add back the after tax expense of interest.

FCFF = EBIT(1-T) + NCC - FCinv - WCinv. FCFF is on an after tax basis and EBIT is
before taxes, so we need to multiply by the firm’s after tax rate which is (1-T). EBIT does not
include interest charges, so we do not need to add back Int(1-T).

FCFF = CFO - FCinv + Int(1-t). CFO includes depreciation and change in WC, so the only
thing left that is not accounted for is to add back the interest expense and subtract FCinv.

FCFE = FCFF +/- Net borrowing - Int(1-T). We need to subtract the interest expense now
because FCFE is all the cash available to stock holders.

FCFE = NI + NCC - FCinv - WCinv + net borrowing. This formula again doesnt include the
addition of int(1-t) back because NI already deducted it out.

FCFE = CFO + net borrowing - FCinv. Notice FCFF adds back int(1-t) but FCFE doesn’t.

Also, try to remember how to get WCinv and FCinv.

WCinv = AR + Inv - AP
FCinv = change in gross PP&E or change in net pp&e + depreciation. Net pp&e +
depreciation = gross PP&E.

CF is cash flow from continuing operations before capital expenditures.

FCF is uncommitted freely-available cash flow after capital expenditures to maintain
operations at the same economic level.
FCFF is free cash flow to the total firm.
FCFE is free cash flow to the equity owners.
FCFCE is free cash flow to the common equity owners.

FCFF adjusted for debt, if any, gives FCFE.

FCFE adjusted for senior equity, if any, gives FCFCE.

For a firm with no debt and no preferred stock or any other senior equity issue, FCFF and
FCFE and FCFCE are identical. This is the current situation for as Yahoo! Inc.