Hello, Let’s say that a company is deciding between expensing/capitalizing an expenditure related to the purchase of a capital asset. Would free cash flow to the firm (FCFF) be affected by this decision (exl tax)? I
In one of the CFA mocks it is mentioned that the FCFF wouldn’t be affected by this decision. Unfortunately, i have some problems wrapping my head around this. Would be greatly appreciated if someone could provide an example with some numbers. Thanks!
I had the same problem, the rational is that taxes will be higher for the firm that chooses to capitalize which will leave net income and FCFF unchanged. Lots of assumptions but it is what it is.
The mock exam i took said that the test taker should ignore any tax impact when answering the question. Therefore it sounds like we had a similar, but not identical, mock exam. In my case, they (the exam provider) are stating that operating CF and Capital expenditure would increase by similar amount. Unfortunately, i had some major problem wrapping my head around this without any numbers (yeah, i love them!)…
Anyone who could provide me with a numerical example? Deeply appreciated!
ping 
You sell $100 worth of stuff, and buy $40 of capital equipment, all cash. That’s it. No depreciation, no working capital investment, no taxes, no interest.
If you expense it:
FCFF = NI + NCC + Int(1 − t) − FCInv – WCInv
= $60 + $0 + $0 − $0 − $0 = $60
If you capitalize it:
FCFF = NI + NCC + Int(1 − t) − FCInv – WCInv
= $100 + $0 + $0 − $40 − $0 = $60
S2000: Many thanks! Just have to say that your website has been of great use during my preparation, simply brilliant!
You’re quite welcome.
And thank you for your kind words.