Mar/Jun 2017 - Chrysos

Because the value of the business is the PV of the future cash flows. The 1,200 is only relevant in the preparation of the new SOFP.

Morning John. Just a quick simple question regarding the FCFF format. I have a query regarding the tax calculation. If i'm not mistaken it should be more or less like this right : PBIT xxxx (-) Tax @ n% (xxxx) (+) Dep xxxx (-) Capex (xxxx) (+/-) WC xxxx _______ _____ FCFF xxxx My question is, in the calculation part of b(i), the answer scheme derive the tax figure on the last part after taking into account other things ie after PBIT deducting the depriciation. Shouldn't it be derived from PBIT in the first place before proceeding with other calculations? Kindly verify this for me. Thankyou john. Wish u well :)

I presume that you are referring to Appendix Three in the answer, in which case the tax has been calculated on the profit after depreciation (but before interest) which is as it should be. Although depreciation is not a cash flow, it is not added back because the question says that the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation (which is common wording by the current examiner). Therefore there is a cash outflow equal to the amount of the depreciation and so it doesn't need adding back.