Free Cash Flow, I'm very much confused...

Can anyone explain why we must adjust for inflation in the following equations?

FCFt = (1-b)*NOPATt

FCFt = (1-greal/ROCreal)*NOPATt

b = retention ratio NOPAT = net operating profit after tax g = growth rate ROC = return on capital

probably because you are using REAL growth rate and REAL return on capital. This way you will forecast REAL FCF. To derive nominal FCF, you need to adjust for inflation.

As thinkwiseandact says. You need to adjust for inflation because you are using real variables.