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Hi!
I must compute the FCF and I’ve been given the Profit before depr, int and tax and the tax allowable depreciation on non current assets.
My view was the following:
PBDIT
– tax all depre
= tax. Base
x tax rate
= tax charge
Now the FCF = PBDIT – tax chargeIn the answer from rev kit I have the following:
FCF = PBDIT – tax all deprec – tax charge meaning profits bef interest and tax – tax (leaving the impact of depreciation)Can someone please explain why is like this?
Thanks a lot in advance
The current examiner always assumes (and usually, but not always, actually says in the question) that extra investment is needed each year of an amount equal to the depreciation in order to maintain the earning power of the assets.
So although depreciation should be added back (as not a cash flow), then same amount would need subtracting (as the extra investment) and so easiest is to do neither 🙂Because you have asked in the Ask the Tutor Forum, the ‘someone’ will always be me for Paper P4 🙂
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Indeed, you are the most right!
Thanks a lot master! ?
Simona
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