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Free Cash Flow – treatment of investment in non current asset

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Free Cash Flow – treatment of investment in non current asset

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • February 27, 2024 at 7:41 am #701263
    emkay
    Participant
    • Topics: 3
    • Replies: 3
    • ☆

    In Chrysos, while estimating the value of mining and shipping business unit, the 1,200Mn $ investment in equipment is not reduced while computing the free cash flow.

    However, in Chikepe, the value of 98.2 MN $ is adjusted while arriving at the PV of cash flows of Foshoro Co.

    The question seems to state that a investment is required in both these cases but the treatment is different in both these cases. Could you please help me understand what is different in these two questions with respect to investment and why they are being treated differently while computing the PV of cash flows

    February 28, 2024 at 8:57 am #701357
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54687
    • ☆☆☆☆☆

    In Chrysos the investment is a one-off as part of the restructuring, and the question asks for the value after the restructuring – so it is based on the future free cash flows after the restructuring.

    In Chikepe there is additional investment in future years and so the future free cash flows are affected by the future investment.

    February 28, 2024 at 10:56 am #701365
    emkay
    Participant
    • Topics: 3
    • Replies: 3
    • ☆

    Thanks John, for your response. Sorry, but am a little confused here.

    Given that the initial investment in Chrysos is part of the restructuring scheme, which would have not been incurred, if the scheme was not opted for and also that the future cash flows also grow by 4% after this investment, would it not be appropriate to account for this investment as well as part of cash outflow, while estimating the free cash flow.

    February 28, 2024 at 4:32 pm #701382
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54687
    • ☆☆☆☆☆

    No. It is because the value if always the PV of the future cash flows.
    Given that they require the value after the restructuring, it is only the free cash flows from then on that are relevant (in theory) for determining the value.

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