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John Moffat.
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fiz90
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Hello Sir
i noticed in the calculation to free cash flow in this question they deduct depreciation from EBIT and then calculate tax. In your lecture, you taught us to deduct tax from EBIT and then add depreciation. Can you please explain this as i am concerned with the exam around the corner.
Thank you
John Moffat
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It is for the same reasons as I explain in my lectures on investment appraisal.
The question says that “the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation”. This is what the current examiner normally writes, and in this case it is not necessary to add back the depreciation (because although the TAD is not a cash flow, there is a cash outflow of the same amount).
fiz90
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