Final answer:
Calculating expected free cash flows for capital budgeting involves forecasting sales, expenses, profits, capital expenditures, and working capital needs, and then discounting these values to the present using an appropriate discount rate.
Step-by-step explanation:
In order to calculate expected free cash flows for capital budgeting, firms must project future sales, expenses, and profits to understand what cash will be available after taking care of operations and capital expenditures. This involves deducting capital expenditures and working capital needs from operating cash flows. Additionally, firms need to apply an appropriate discount rate to estimate the present value of expected free cash flows, which accounts for the time value of money and risk associated with the investment.
An important aspect is predicting future sales, costs, taxes, changes in working capital, and capital expenditure. These elements are critical when calculating free cash flows. To determine the present value of these cash flows, the expected profits are considered along with the chosen discount rate, which can significantly affect the valuation.