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Hi
I have several questions regarding Q3.1. When calculating FCF of Ndege, the answer deducted tax allowable depreciation but why dont add depreciation back ?
2. When assessing department C, it actually calculate the gain from disposal and in the end minus the full department C assets included in 207.0m. This doesnt make sense.
Thank you
1. Note (vi) of the question says to assume that the amount of depreciation is the same as the investment needed to maintain operations. So although you would add back the deprecation, you would then subtract the same amount as investment – so easier just to do neither 🙂
2. I am not sure I understand you. To calculate the gain, the answer is comparing the value of the combined company (which includes dealing with department C) with the total value of the two companies as they currently stand.
Sir
When the question mentions tax allowable depreciation, I prefer to account for it by multiplying the deprecation by the tax and adding it back as a separate cash flow, added to the after tax cash flow.
For questions such as the one above, when we are told that the amount of depreciation is the same as the investment needed to maintain operations, how would I account for this using my method?
Thanks
By all means deal with the depreciation the way you have written (as a separate tax saving).
However, if there in investment needed to maintain operations of the same amount, then you need to show an extra cash outflow of the amount of the depreciation. It does not affect any of the tax flows and you would show it after the tax flows.
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