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Hi all,
Another question desperately need to help! In the past paper June 2010 Question 2 (i), why the answer provided using “NOPAT-net reinvestment” to arrive at Free Cash Flow??
From my understanding, the NOPAT contains Economic Depreciation amount value, while Free Cash Flow deducts the depreciation to arrive at the true cash flow available for use. In that case, the official answer seems like to be wrong?
Anybody can help me to clarify the question and answer? HELP!!!
Thanks
NOPAT = EBIT(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure
It adds back the depreciation (and certainly does not then deduct it) precisely because depreciation is not a cash flow.
The examiners answer is correct 🙂
Hi John,
Thanks for your reply. But I checked around on both Internet and study materials. They all indicated that NOPAT has contained deprecation amount. Especially when we look at the EVA Valuation Method for cooperate valuation, (EVA= NOPAT- WACC*Capital employed), It is cleared shown that to arrive at NOPAT, the “replacement cost depreciation (economic depreciation)” has replaced the “accounting deperciation”.
I am totally confused, Can you clarify it if you have time? Thank you!
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