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In (b), in order to calculate the FCF, the annual reinvestment is deducted. But what about the additional one-off capital investment of $80?
From what i’ve learned, capital investment should be deducted to arrive at FCF.. but why is it not done here?Where you are finding this question?
The reason I ask is that the original exam question does not have a part (b) and there is no investment of $80.
I found it on the original question :
“An additional one-off capital investment of $80 million in machinery and equipment is necessary to increase sales revenue for both divisions by 7%, with no change to the costs” under corporate restructuring part.*oh, i meant $80 million not $80, sorry!
Sorry – that was me not reading the right part of the question 🙁
However, the value of the business is the present value of the future cash flows discounted at the cost of capital. Because the $80M is invested immediately it would only be relevant in calculating the net present value which is not needed here.
Does it mean that any initial investments in year 0 is not relevant to FCF calculation? Or is it not relevant only when it comes to calculating the value of the business?
When valuing a business.
Although it is the same when appraising a project. The value of the project is the present value of the future cash flows. We then subtract the initial investment to get the NPV and if the NPV is positive then it means that the value of the project is more than the initial cost and therefore we accept it.
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