Hi All,

Pretty late in the game but I have been having trouble with this concept. I believe it is under question 21/22 (I am at the office and I don’t have my book in front of me) in the EOC Questions for Free Cash Flow in the Equity books. The question has you calculate FCFF and uses the standard equation strating with NI. The problem that always trips me up in FCInv. My big question regards the adjustment for depreacation. I was under the impression that if we are given “Net PPE” we find the difference and just subtract it from “NI,” however if we are given “Gross PPE” we find the difference and (here is one are of confusion) subtract or add the depreaciation from it before subtracting it from NI. It makes since to me we add depreciation to the change in FCInv before subtracting it from NI but I think there is a few examples where they subtract it first. When calculating the FCFF/FCFE for those two questions the CFAI answer takes the change in “gross PPE” and subtracts it from NI…

1. Is it Net or Gross PPE that gets the adjustment?

Do I have this whole thing incorrect? Very possible becuase I have been studing alone for the last year and tryng to figure things out by yourself.

Another question is how do you guys find the Change in FCInv? I find it by taking the difference in PPE (as I said above) but sometimes it pops up as change in CAPEX or sometimes (when lucky) they show it as a single line item. Is there a general rule I have overlooked?

Thanks everybody and good luck!

NET PPE gets the adjustment. In the absence of purchases or disposals the change in the Net PPE item on the BS from 2009 to 2010 should just be depreciation.

Beginning 0f 2010 = Beginning 2009 - Depreciation

With gross and no disposal or purchases, you can just subtract Beg 2010 Gross - Beg 2009 Gross

It gets more complicated in examples where they purchase and/or dispose of assets, because you need to know the purchase price (in acquisitions) and the SALE price in disposals. The book value in disposals will be reflected as a decrease from the net value int he beginning of year:

Beginning 2010 Net = Beginning 2009 Net - Depreciation - Book value of disposals.

You may need to find the “gain” in the income statement to get the total value of the Sale price, or the full sale price can be given in the CFI section

And if you purchase an asset during the year keep in mind that the extra depreciation from the purchase will be accounted for in the depreciation number already, so no need to adjust for it.

Beginning 2010 Net = Beginning 2009 Net + Purchases - Depreciation - Book Value of Assets sold

I’m pretty sure this is correct, anyone else can feel free to chime in. These are the Level I-type topics where they throw people off

for FCFF calcs you want to find CapEx

Remember Ending Gross PPE = Beginning Gross PPE + CAPEX - Depreciation - Ending Gross PPE

If they only give you net then you do not need to remove the Depreciation in the above. You do not have to back out depreciation from net numbers since it is in the accum depn

Net numbers mean NET of depreciation. You don’t back depr expense out of gross numbers, you would back accumulated depr out of gross numbers. However, most of the time PPE is reported as a net figure.

Without any disposals or purchases of PPE, ending net will simply equal beginning - depreciation for the year (or, change in accumulated depr)