Calculating FCFF from Net Income

CFA Level II FRA
#1

Hi everyone,
I found something confused when doing some exercises related to FCFF.
We have the formula of FCFF calculated from Net Income as:
FCFF = Net Income + Noncash Charge + [Int * (1-tax rate)] - FCInv - WCInv
Where:
Int = cash interest paid
FCInv = net capital expenditures (equal cash spent on fixed asset - cash received from selling fixed assets)
WCInv = working capital investment

As I understand, gain/loss from sale of fixed assets is included in cash sources when calculating FCInv AND this gain/loss is also included when calculating Net Income. Thus, when we adjust FCInv from Net Income, do we duplicately include the gain/loss from sale of fixed assets?

Thanks for your help!!!

#2

As long as the non-cash charge also includes the gain (or loss) on sale then you would not be double counting the gain (or loss) on sale because the cash received from selling fixed assets already includes that gain (or loss). The following article walks through the accounting for disposal of assets.

1 Like
#3

Oh I got it.
Sincerely thank you!!!

#4

Follow Up question to this. FCFF = NI + NCC - WCInv + Int(1-tax rate) - FCInv

Is WCInv not already subtracted from cash flow from operatoins when calculating Net Income? If so would we be double counting? Thank you.

#5

The WCInv is subtracted from Net Income when calculating Cash flow from Operations (CFO)

CFO = NI + NCC - WCInv