There seems to be many different ways of calculating Fixed Capital Investment for FCFF. I always thought it was the difference in the Gross Fixed Assets. I’ve also seen when Fixed capital is presented as Net and the method used was adding current depreciation expense onto the current year Net Fixed Assets minus Net Fixed Assets (eg. Net 2011 + dep exp 2011 - Net 2010). In the BSAS mock, they just use the difference between Net Fixed Assets. This differs to the methodology used in FCFF question on the CFA mock, where they add current dep exp?? Can anyone make any sense of this?

Depreciation expense is definitely added back to Net amounts to account for used up portions of fcinv. Think of it like eating chocolate bars: I started with 5, ate 2, and ended up with 4. How many did I buy? 4-5+2=1. Same concept as inventory accounting.

Thanks KewZee, it looks to be an error in the BSAS 2012 mock

On another note, sometimes if they provide net fixed asset, it’s easier to just calculate the delta from there and use the figure for FCFF or FCFE calculation w/o the need to separately find DEP and FCInv as (DEP - FCInv) = - (change in net fixed asset)

There is only one correct way of calculating Fixed Capital Investments. Remember the magic formula

FCInv = ** Gross** Total Fixed Assets Current Year - _

**Gross**_ Total Fixed Assets Previous Yer.

what about if there are sale of assets?

if there is a gain subtract from NI. If there is a loss add

two ways

End Gross PP&E - Beg Gross PP&E - Gain on sale

End Net PP&E - Beg Net & PP&E + Depreciation - Gain on sale

If loss on asset, add it back.

to validate my point look at page 144 schweser equitities book

Wouldn’t the book value be reflected in the Net #'s, not the gross?

Ending net = beginning net - depreciation + purchases - book value?

And then gain/loss added/subtracted with book value?

So CapEx would be Purchases - Book Value of assets sold - (+) gain (loss)

N/M - its the same

The formulas presented are correct but give me a tough time in memorizing the +/- signs and which way they go. I prefer to do it the grade school way of a vertical Equation and then solve for FCInv. It feels more intuitive that way.

Beg Net PPE

(-) Depreciation

(?)FCInv

=Ending Net PPE(usually given on a b/s statement or its just End Gross PPE less End Accumulated Dep)

Whatever gives you FCInv you then plug into your FCFF or FCFE formulas e.g

FCF= CFO + int(1-t) - {(?)FCInv you solved }

It dosn’t matter if they sell an Asset for a gain or loss or whateva because the equation still holds. Just rember to hold what ever sign you get once you plug it into your respective FCFF/FCFE calculation.

The only way this method fails is if they ask specifically for the FCInv in a question. If that happens then FCInv is just Capex - Proceeds from sale.