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Evening sir i dont understand how they found the the machinery business value dont we the deduction of depriciaton and also growing the amount $435 by 8% and dividing by 10%it seems different from the way we do free cash flow to equity
The examiners answer has taken the cash flow of $435, inflated it at 8% because the question says that it will be 8% higher in the first year and then stay constant, and the divided by 10% because the discount factor for a perpetuity is 1/the discount rate.
With regard to the depreciation in the calculation of the cash flow. The depreciation itself is not a cash flow and in Paper FM (was F9) we could then have added it back. However as is normal with the current examiner (and as I explain in my free lectures) we do not add it back here because the question states that “the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation”.
As far as the SOFP is concerned, we have no choice but to assume that the restructuring takes place immediately (i.e immediately after 28 February 2017) and therefore there is no extra depreciation to be accounted for in preparing the SOFP.
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