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Hello!
When calculating the value of the business based on free cash flow method we deduct the additional investment in assets. But in this question, the additional investment of $50 million has not been deducted. Can you please explain why is it not deducted?
(The date given in the question is 1 JAN 2Ox3 and the financial data we are provided with is of 31 DEC 20×2.
So the reason of not deducting could be that we are calculating the value of business on 1 Jan and investment will be made in the year. But if that is the case , then why is 50 m is added to the asset to calculate the depreciation?)Thanks.
The value of the business is the PV for the future cash flows.
We would only subtract the addition investment if it was a future cash outflow, but here we have to assume that the investment would be made immediately. Therefore doesn’t affect future cash flows but will affect the future depreciation expense.
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