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Hi,
I’m struggling to understand why the depreciation is being taken away in the calculation for the Cash Flow calculation in bi) for the management buy-out
I thought we ignore depreciation as it’s a non-cash item?
Thank you in advance
If you read the second paragraph under ‘assumptions made’ in the examiners answer, you will see that depreciation has not been added back because it is assumed to be the same as the capital needed for reinvestment purposes (which means to maintain the capacity of the business)..
This is something the current examiner does regularly, and explain the reason and the effect in my free lectures on investment appraisal.
Thanks for this. I found it misleading to call it depreciation rather than additional investment, for example. But that makes sense.
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