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Dec 2012 Question 1
What is the relevance of the flowing statement
It can be assumed that the annual reinvestment in assets required to continue with the current level of business is equivalent to the annual amount of depreciation.
Depreciation is not a cash flow and is therefore not part of the calculation of the free cash flow. If we are given the profits then we will usually add back the deprecation.
However, what we do bring in is the investment in assets need to continue the business because that is a cash flow.
So….if the investment is the same figure as the depreciation it is not necessary to add it back (the depreciation) and then subtract the same figure (for investment).
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