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I did not add back the depreciation because it said they were not disposing of assets but increasing. If that be the case then the depreciation is required to replace assets in 5 years………OR…..for purposes of the exam must I assume that any increase in non current assets given assumes I must add back the depreciation as cash flow. Really, this is very confusing. I could tell you in a heart beat how that would be dealt with in real life but the ambiguity of ACCA turns it into a complication
Adding back depreciation is nothing at all to do with replacing assets in the future – that is a financial accounting concept and is of no relevance whatsoever.
DCF appraisal is based on cash flows (whether in real-life or in exams – it is the same) and depreciation is added back because it is not a cash flow!!!
There is no confusion and no ambiguity – it is the fundamental basis behind the concept of DCF investment appraisal (right back to Paper F2).
As I explain in my lectures, the current examiner adds the line ‘an amount equal to the depreciation charge is required to maintain the current operating capacity’ (or words to that effect). In that case there is a cash outflow equal to the amount of the depreciation. So adding back the depreciation and then subtracting an equal amount as a cash outflow has no net effect (and so they can both be ignored).
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