- This topic has 3 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
Sir, this is quite embarrassing, I was hoping you could help me.
I have 2 questions:Depreciation is always a part of operating expenses right, so therefore we include it in the operating expenses in a statement of profit or loss. But then when we use the net profit to calculate the value of a business (FCF method) why don’t we add back depreciation especially because it is non cash expense ?
Sir, my second question is, I have been seeing this specific statement in certain questions, could you help me understand what they mean “depreciation is X, this is the amount of investment required to maintain the current level of activity”. What should I do when I see this line? I think it means no need to add back depreciation to the statement because the same amount has been deducted as investment expenses?
Thank you so much
Depreciation is not a cash flow and we would add it back were it not for the fact that the question says “The annual reinvestment needed to keep operations at their current levels is roughly equivalent to the tax allowable depreciation”. So adding back the depreciation as a non-cash flow but then subtracting the same amount would net off to zero. As I do explain in my lectures, this is something that the current examiner states in almost every DCF appraisal question.
You second question explains the first question 🙂
- The topic ‘Doric ( 2013 pilot exam )’ is closed to new replies.