- This topic has 3 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Hello, I wish to know about the FCF computation in (c). Normally when we compute FCF we use the EBIT to calculate tax then only deduct the investment to maintain operation. In this case, since the depreciation is equivalent to investment, so we don’t need to deduct the investment again. But what if the investment amount is different, do I have to net tax from the investment amount? And also, I wish to double confirm whether tax is always deducted and calculated from EBIT for FCF?
Tax is always deducted from EBIT (or the cash flow from operations, depending on the information given) to get free cash flow (because tax is a cash outflow).
If we are using EBIT, then after calculating tax, the depreciation needs adding back as it is not a cash flow.
However, if (as is usually the case with the current examiner) you are told that the amount needed to maintain operations is the same as the depreciation then you don’t need to add back the depreciation (because the amount you would be adding back would be the same as the amount of the outflow you would then be bringing in).If the investment amount is different, then you would add back deprecation and subtract that actual amount of the investment. However this will not happen in the exam.
- You must be logged in to reply to this topic.