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Hello Tutor,
would like to ask:
1) calculate funds available from sale of division
why NRV 210 (100+110) is used instead of BV 330 (110+220)?
as only fridge division’s asset is sold2) calculate value of new company.
in calculating cash flow, understand that depreciation (non cash expense) should be add back to PBIT if it had been deducted.but the answer provided shows to deduct depreciation from Profit Before Depreciation.
may I know which formula to be used?Thank you
1. Part (b) of the question (which is where 210 has been used) is closing down the company entirely (not just the fridge division). If they do the the finds available are the realisable (sale) values.
2. You cannot learn formulas here – it is P4!
The depreciation is subtracted in order to calculate the tax.
We would usually then add back the depreciation because it is not a cash flow. However the question states (in the last paragraph before the requirements) that the investment needed to maintain the current level of activity is the same as the depreciation.
So strictly we should add back the depreciation and then subtract the same amount as being the investment needed – but doing neither achieves the same result 🙂
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