# FCFE question about where to include depriciation

Reading 36 Free Cash Flow Valuation, End of chapter question 6.

In this question they ask you to do a FCFE valuation of a company. In the book answer they say to use this equation,

FCFE = Net income - (1-DR)(Capital expenditures - Depreciation) - (1-DR)(Investment in working capital). DR is the debt ratio of financing investment.

When I did the problem I used the usal FCFE equation (FCFE = NI + NCC - WCinv - FCinv + Net borrowing) and got a slightly different answer. The difference was because when i calculated it I did not multiply deperciation by (1-DR).

My question is why do they subtract deperciation before calcuating the amount fiananced by debt? It is part of NCC, so it seems like it should not be included in the financing part of calculated FCFE.

Note that DR is debt-to-total-assets, which is assumed to be constant. Capital expenditures will increase assets (thus increasing debt, to maintain the ratio), and depreciation will decrease assets (thus decreasing debt, to maintain the ratio).