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Dear Tuitor )
Please explain – why didn’t they put economic depreciation for lease adjustments for NOPAT in model answer?
I caught on the exam the funny thing regarding WACC calculation with 100% D/E ratio, but I also added adjustment for lease depreciation and it seems that was wrong (
Thanks
Look at Note 1 just after the recalculation of EVA in the answer. No depreciation adjustment has been made because we have not been supplied with a figure for economic depreciation.
Thanks for the answer.
I saw this Note 1, but usually it is said that if you do not have economic depreciation figures you could take financial depreciation instead for example. Anyway I suppose that we should depreciate capitalised value for leased asset – don’t we? It is also said at the scenario ‘The operating leases have an average life of four years.’ Why shouldn’t we depreciate that during mentioned 4 years?
If you take the financial depreciation instead of the economic depreciation you will simply add and subtract the same amounts. The profit figure you will have started with will already bear the financial depreciation, so no adjustment is needed if we have to assume that the economic depreciation is the same.
The answer does depreciate the capitalised value of leased assets over 4 years, 115/4.
Is that OK. I think it’s a tough question asking for an audit of someone else’s calculation.
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