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Sir in this question when calculating the value through free cash flows of the smaller division the examiner has deducted the amount of depreciation but not added back the amount to maintain NCA which is stated in question to be same as it
So the value of the smaller division should be PBDIT=840 plus dep (12%*20%*7500M+5400M)
Less same amount
=840$
Tax 18%
Cash flow =688.8 *1.08/0.1 *0.7 = 5207M$
If i did this way would i get any marks ?In Paper FM, we subtract depreciation in order to calculate the tax, and then add back the amount of depreciation because it is not a cash flow.
However the Paper AFM examiner usually (as in this question) includes a line stating that an amount equal to the depreciation is needed in order to keep operations at they current level (which is a cash outflow). Therefore we still subtract the depreciation in order to calculate the tax, but we do not then add it back because although the depreciation itself is not a cash flow there is a cash outflow of the same amount.
I do stress this in my free lectures on investment appraisal, because it is so common for the current examiner to include this line.
I do remember that you calculated in the example of investment appraisal topic but after when we calculated free cash flow to equity in later chapter i just kixed it up the format
Sorry sir
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