To derive unlevered free cash flow from revenue projections, which sequence is correct?

• A. Revenue minus COGS and Operating Expenses to obtain EBIT, apply (1 - tax), add back depreciation and other non-cash charges, and subtract CapEx and changes in working capital
• B. Revenue minus taxes, ignore depreciation
• C. Revenue times net income
• D. Revenue minus only CapEx

Answer: (A)

The main idea is to turn revenue into cash available to all investors by first capturing operating profitability, then adjusting for taxes, non-cash expenses, and the cash outflows needed to sustain the business.

Start with revenue and peel back operating costs to get EBIT (earnings before interest and taxes) by subtracting COGS and operating expenses. Apply taxes to that operating income by multiplying EBIT by (1 minus the tax rate), which gives after‑tax operating income. Depreciation and other non‑cash charges lower accounting income but don’t use cash, so you add them back. Finally, subtract the cash needed for sustained investments in the business: capital expenditures and changes in working capital. Doing these steps in that order yields unlevered free cash flow, which represents the cash available to all providers of capital before any debt financing.

The other approaches miss key elements or oversimplify. Merely revenue minus taxes ignores operating costs and non‑cash adjustments; multiplying revenue by net income mixes in financing effects and ignores non‑cash addbacks and working capital and capex; and subtracting only CapEx from revenue neglects taxes, operating profitability, and working capital needs.