This is my first message here, I’ve already intensively used google and textbooks to find an answer to this question but I still can’t find an unanimous formula for this.
When we calculate FCFF from EBIT, the commonly accepted formula is:
FCFF=EBIT*(1-t)+D&A-deltaNWC-CapEx (with the latter 2 calculated coherently with the signs)
When it comes to calculate CapEx, i know that it must be computed as the variation between two subsequent years of fixed assets (paying attention to the fact that a positive variation negatively affects cash flows), BUT should I add back in the CapEx an amount equal to the D&A item value? (justified like this “which is the minimum investment that the company must make”).
In its most simple form Capex should be calculated as Net PPE Beginning of Period minus Net PPE End of Period minus Depreciation (=equivalent to your fomula above).
I assume that the textbooks you mentioned above use Gross PPE instead of Net PPE. If so, it is not needed to add back the Depreciation any more.
Let me ask a follow up question: the PPE values as reported in the balance sheets are they gross or net? If I use those numbers to calculate the CapEx should I add back Depreciation?
Can I calculate Capex as Investments in F.A. less Divestments of F.A.?
I’m sorry if the questions sound naive but I’m finding myself in a sea of uncertainty when it comes to discerning between Gross and Net PPE.
The values on the balance sheet must be always net values , although sometimes you will see the gross value (=historical costs) in one line and the accumulated depreciation in the line below and below as a resulting value the Net PPE.
So the way is to take delta of year one and two of the net values from the balance sheet and add the depreciation from the income statement to get the CAPEX.
Year 1: Historical Costs PPE = 100 Accumulated Depreciation= (50) Net PPE = 50
Year 2: Historical Costs PPE = 150 Accumulated Depreciation= (60) Net PPE = 90
Method 1: Delta Net PPE + Depreciation (= Delta Accumulated Depreciation or otherwise taken from the Income Statement) = 90 - 50 + 10 = 50
If you do it the way as described above you do not need to bother with divestments in calculating CAPEX as these are already considered in the gross and net balance sheet values.
However, bear in mind that if you want to calculate CFI you need to calculate the cash inflow from the divestments (i.e. eliminate gains/losses from net income and calculate the selling proceeds.) This topic is extensively covered in the CFA FRA book in relation with the calculation of the Cash Flow Statement.