I could have sworn that I’ve seen threads on this but for some reason cannot find one at the moment. There are several places where WCInv is used / defined, so I want to be sure to get them right. In capital budgeting, when we talk about WCInv, we just take the difference in CA - CL In FCFF, we adjust WCINv by taking out cash from CA and payables & current portion of long term debt from CL Why the difference? I think I understand the reason for the adjustement when calculating FCFF: we need the sources of cash (so we ignore cash & equivalents) and also we already account for the interest cost and so we exclude the changes in debt from WCInv. But why don’t we make the same adjustements for capital budgeting? Is it just a perspective thing?! Also, while we are on this subject… FCInv / CAPEX. Is it safe to just take the difference in PP&E balances from the b/s?? Or gross fixed assets or some such? Many thanks to whomever (whoever?!) sheds some light on this.
On the liabilities side, you are excluding interest bearing debt. I’m not sure why we don’t make this adjustment in capital budgeting and it’s not in the LOS, so at this point I don’t really care. For FC Inv/CAPEX, take the difference between the gross number.
I wrote a really long explanation about this. I think it was pg 376 of the CFAI Equity book. Basically, you’re right about Capital Budgeting. CA-CL. For FCF valuation, it’s (CA - cash/ce/stms) - (CL - STD/current portion LTD). As to the why, you’re trying to explain the change in cash when doing the FCF valuation so you leave cash based assets and liabilities alone. In cap budgeting, you’re mainly concerned with the working capital increase and reversion in the terminal year so you can calculate the NPV & IRR and make a decision about the project. Lame answer, I know, I know. But, that’s the best I’ve got at 10pm. Now, onto the FCinv. GOOOD question. For FCF valuation, it is essentially the capital expenditures, but you must also reduce CAPEX by any amount received from sale of fixed capital. So, just take the Change in Gross Fixed Assets. For capital budgeting, FCinv is usually given you as the cost of the fixed asset. You would not back out the sale from any other fixed assets UNLESS you were working on replacement project, then you would include the sale of the old asset alongwith the cash outflow to purchase the new fixed asset.
Thanks David. That helped.