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Sir
i have asked this before but it confuses me everytime:
“annual dep on nca is 10% and this is the amount of investment needed to maintain the current levels of activity”
i am somehow unable to grasp the implications of this.
in this question, dep is NOT added back to get the free cashflow to firm.
if the reinvest amount is invested back, that is a cashflow. and thus the dep shd be added back.
i am assuming we deduct dep just to calculate the tax.
can u pls explain the implications of the above statement
regards
The depreciation is added back, because it is not a cash flow.
However, new investment then needs to appear as a cash outflow.Since the two amounts are the same, we end up with the same net cash flow if we do not add back the depreciation and do not separately subtract the new investment.
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