Sign up  |  Log in

Capital Expenditure Calculation for FCFE

Reading 36, CFAI, Volume 4, Explanation of Q#13.

I am unable to understand working of capital expenditure. I believe it should be difference of gross fixed assets of 2007 and 2008, whereas in this suggested solution cap expenditure= 2008 gross PPA - 2007 net PPA. I am not getting this.

Regards

Master the Level II curriculum by creating custom quizzes in the SchweserPro™ QBank. Question difficulty automatically adapts to your ability level on a given topic, measuring your knowledge and keeping you motivated. Included in every Schweser Study Package.

It doesn’t make sense, you have it right.  Gross cap ex 2008 - gross cap ex 2007 should equal 38 (as provided at the bottom) but it doesn’t.  

Anyone else have an idea what is missing here?

Look at the balance sheet…. they don’t provide you gross PPE, they provide you NET PPE (net PPE is Gross PPE net of accumulated depreciation).  If you add the 2008 CapEx ($38) as provided at the bottom to 2007 net PPE ($474) less 2008 Net PPE ($489) you have your depreciation amount for 2008 of 23. 

Would You Look  yes your are right that capital expenditure is given in question.  But if we want to calculate it by adding depreciation, which is given in income statement, we will not get capital expenditure of 38.
Let me explain in another way:
 
Gross PPE 2007 = Net PPE + Depreciation

            494         = 474+20        

Gross PPE 2008 = Net PPE + Depreciation

            512              =  489+23

512-494 =18 NOT 38

But 2 things here:

1) They have provided capital exp for both years; and

2) we will get same net PPE if we will prepare movement summary:

Net PPE 2008= Opening PPE (Closing net fixed assets as at 2008) + cap exp (given)- depreciation (2008)

               489  =474 +38-23

Thank you for discussion.



I think you might be confused on what gross plant is… Net Plant + Annual Dep Expense does not equal gross plant.  Net Plant + accumulated depreciation = Gross plant.  

You are right. That is point.  Would You Look thanks for discussion.

so whats the actual way of calculating the fixed assets portion in the free cash flow?

Cuz i got $18 as well and the book put $38