FCFF Capex and Depreciation

CFA Level II FRA
#1

In the morning Mock Exam of the CFAI, one of the questions computes Capex as:

FixedAssetst-FixedAssetst-1+Depr

Is this correct? Because aren’t we counting Dept en twice, since we also added that in the overal computation of FCFF, given as:

FCFF = NI + Depr+Int(1-t)-FCInv-WCInv

#2

That was the one question I got wrong for all of equity. I later found out that it’s because the question is giving us Net Asset which is the asset value after adjusting for depreciation. We need to find the total capital expenditures which would have to be done with what we’re given before depreciation is reflected in the asset value. Therefore we add it back in this case to reflect just the change in CAPEX. In this case the only change in total assets was the depreciation charge which is why CAPEX for this question was 0. We weren’t investing into more assets, we’re just letting our total assets depreciate over time.

#3

That’s correct if (and only if):

  • FixedAssetsn means _ net _ fixed assets (i.e., net of accumulated depreciation)
  • Any fixed assets sold generated no net gain or loss
#4

Aha, that makes sense of course. Thank you both for your explanation!!!

#5

My pleasure.