# FCInv calculation

This is for reading 36 (free cash flow valuation), Schweser concept check 22. -Begin gross fixed assets=\$90; end gross fixed assets=\$136 -begin accum dep=\$30; end accum dep=\$40 -capital expenditures=\$65 -piece of equipment with original book value of \$19 was sold for \$10. The equipment had a book value at the time of the sale of \$2. The answer has FCInv as \$65 - \$10 =\$55. So capital expenditure - proceeds from sales of long-term asses. Why does end gross assets - begin gross assets - gain on sale not equal to 55 as well (\$136 - \$90 - \$8 = \$38)? This is the formula given by the book for FCInv with long term asset sales.

First of all, see: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91329563 Especially, post 4 and 5.

Secondly, what you are doing should be right. So, it might be an error. However, I do not have the Schweser material.

I don’t have Schweser, but i would assume this is because you are using gross fixed assets so need to use the original book value when calculating the gain/loss on sale:

\$136 - \$90 - (\$10 - \$19) = \$55

This could be right @ ro424.

Because if we would use the equipment book value at the time of sale, we would ignore the depreciation in that year. However, I’m not fully satisfied with this answer.

can anyone with Schweser clarify the answer?

Interesting question…

They’re asking to calculate FCFE and provide several ways to calculate FCInv. The back of the book is using change in Net fixed assets + depreciation to get their FCInv figure of 63. I think they’re not bothering with the gain/(loss) in FCInv (reduction to FCFE) because the gain in showing in NI, which offsets the FCInv difference. I think the kicker here is that accumulated depreciation is understanded by the amount of cummulative depreciation expensed on this specific asset, which is 17. this really doesn’t make sense to me…

Using their implied Gross method:

(136 - 90) + 17 - 8 = 55

EDIT:

Schweser Errata :

Page: 178 - Ignore question 22 on page 178 Candidates should ignore question 22 on page 178. ( Posted: 2014-02-12)

Bingo

This is also important:

Page: 145 - SchweserNotes Book 3, page 145: Ignore formula Under the section “If long-term assets were sold during the year”: Candidates should ignore the formula for FCInv using gross PPE. ( Posted: 2014-02-12)

To clarify: it is wrong in Schweser. The third post of ro424 should be ignored. The right formulas are given (again) here:

With BS information given:

FCInv = ending gross PP&E - beginning gross PP&E - gain on sale

FCInv = ending net PP&E - beginning net PP&E + depreciation - gain on sale

where gain on sale = proceeds from sale - book value of asset sold

With IS information given:

FCInv = CAPEX - proceeds from the asset sale

thanks for clearing

The solution in Schweser is wrong (the calculation of FCInv) but the result should be correct.

Beginning gross PPE = 90 = 71 + 19 (asset was sold) = 71 + 17 (depreciation) + 2 (book value at the time of sale)

Depreciation = 27 = 17 (depreciation of sold asset) + 10 (change in accumulated depreciation)

Ending gross PPE = Begining gross PPE + CAPEX - Original book value of sold asset = 90 + 65 - 19 = 136 = 71 + 65

Net come should be adjuseted for gains or losses on sale of long-term assets = 50 - (10-2) = 42

FCInv = CAPEX - sales proceeds = 65 - 10 = 55

or FCInv = Ending net PPE - Beginning net PPE + Depreciation - gains on sale of long-term assets = (136-40) - (90-30) + 27 - 8 = 55

FCFE = Adjusted NI + Depreciation - FCInv - WCInv = 42 + 27 - 55 - 4 = 10

Why do we add back depreciation in the net PP&E formula