# FC INV Confusion (FCF - Equity)

Hi Chaps,

What is the FC Inv in this question:

Taking the relevant info:

2012 NET PPE = 789.9

2013 NET PPE = 853.7

2012 Depreciation = 75

2013 Depreciation = 98.5

I would calculate this as (853.7 + 98.5) - (789.9 + 75) = 87.3

That would be grossing up the fixed assets for each period and then taking the difference.

The answer suggests it is the change in NET PPE + 2013 depreciation. 853.7 - 789.9 = 63.8. And then 63.8 + 98.5 = 162.30

162.30 is the FC Inv for this question.

I do not understand this intuition and why it does not reconcile with my approach. Can anyone please advise?

It seems correct to me, where is this question?

It’s in a fitch learning item set book.

What seems correct, as in Fitch’s solution or mine?

No, the FCInv is ending net PPE (PPE in 2013) minus beginning net PPE (PPE in 2012) + depreciation for 2013 from the Income Statement

853.7 - 789.9 + 98.5 = 162.3

This is how I always calculate.

BUT I have no idea why it does not reconcile with your grossed up solution?

As the 2012 depreciation would have been taken care of in 2012, you need to add the whole 2013 amount.

FC Investment includes topping up yearly depreciation expense, otherwise you are only counting new FC investment each year. Including 2013 depreciation expense ensures you are accruing for depreciation as it goes along, rather than only accounting for large expenses when fixed assets need complete overhaul.

oh and as you are taking the difference between net 2012 ppe and net 2013 ppe, you dont need to double count the depreciation

Thanks for the answers, but I am still a little unsure on this. S2000 beacon call?

You’re confusing depreciation (expense) with accumulated depreciation.

You don’t get gross PP&E by adding depreciation expense to net PP&E; you get gross PP&E by adding accumulated depreciation to net PP&E.

It might be easier for you to see if you assume some number for accumulated depreciation (A/D) and work from there.

Suppose that 2012 A/D is 200. Then 2012 gross PP&E is 789.9 + 200 = 989.9.

In 2013 we have depreciation expense of 98.5, so 2013 A/D is 200 + 98.5 = 298.5. Net PP&E is 853.7, so gross PP&E is 853.7 + 298.5 = 1,152.2. Thus, FCInv must be 1,152.2 − 989.9 = 162.3.

By the way, you should try it with some other assumed 2012 A/D – say, 300 – to convince yourself that that number doesn’t change the result.

You don’t use the 2012 depreciation expense because it’s already included in the 2012 A/D, so it’s already included in the 2012 net PP&E.

Rex, maybe it will make more sense if you think about it as rolling forward PPE balances from one period to the next:

Beginning PPE + (New Purchases - Sales) - Depreciation = Ending PPE

Hopefully this makes intuitive sense. You just plug and play to solve for the missing piece.

Just to be completely clear.

Thank you millions both, Makes more sense now I am doing FCF now and don’t understand this.

If FCInv = Ending - Beginning Net PPE + Depreciation, then why add Depreciation to NI?

Is it not relevant?