Can anyone confirm the correct way to calculate Fixed Capital Investment with regards to calculating FCFF and FCFE?
CFAI p152 EOC #20
FCInv = Net purchase of fixed assets = Increase in gross fixed assets (ending gross fixed assets - beginning gross fixed assets)
Schweser book 3 p 184 #22
FCInv = ending net PPE - beginning net PPE + depreciation
Both questions gave begining and ending gross fixed assets and also beginning and ending accumlated depreciation.
Any input would be appreciated.
ending net PPE = ending Gross fixed assets - End Depreciation accumulated
beginning net PPE = beginning Gross fixed assets - Beginning Depreciation accumulated
So End Net PPE - beginning net PPE = (ending Gross fixed assets - End Depreciation accumulated) - (beginning Gross fixed assets - Beginning Depreciation accumulated)
= Ending Gross Fixed Assets - Beginning Gross Fixed Assets - End Depreciation accumulated + Beginning Depreciation Accumulated
= Ending Gross Fixed Asset - Beginning Gross Fixed Assets - Depreciation in period
So both formulae are the same.
FCInv = Ending Gross Fixed Asset - Beginning Gross Fixed Assets
= Ending Net PPE - Beginning Net PPE + Depreciation in Period.
Easy as that. Thanks.
Hi, I’m also confused about this question in the Schweser challenge questions (q22 p178 and answer p184) The FCInv as mentioned above is either: FCInv = ending gross fixed assets - beginning gross fixed assets Or FCInv = ending net PPE - beginning Net PPE + depreciation These are supposed to be equivalent but using the information in the question give very different answers. The info available is: *Beginning gross fixed assets =$90, ending gross fixed assets = $136 *Beginning accumulated depreciation =$30, ending accumulated depreciation =$40 *Depreciation expense =$27 The answer they give uses ((136-40)-(90-30)+27) = $63 but I am confused why using the gross fixed asset equation of (136-90) = 46 if they are supposed to be equivalent? Can someone please help explain this? Thanks very much
Anyone who can help with this please?
I actually tried working through this to get rishi5001 an answer, but I’m getting tripped up with the fixed asset sale in the question as well…
A piece of equipment with original book value of $19 was sold for $10. It had a book value of $2 at the time of sale. The gain was classified as unusual, however…
So two questions regarding FCInv
Do we deduct the gain for the sale of an asset when it’s considered unusual?
Even so, the math doesn’t seem to add up as mentioned above…Perhaps I’m calculating my gain (or loss) incorrectly.
End Gross Fixed Assets = 136
Beg Gross Fixed Assets = 90
Gain on sale = $10 (sold it for) - $2 (BV @ time of sale) = 8
Therefore…
136-90-8 = $38, which is different from our Net PPE of $63.
Any help would be appreciated. Thanks all
the formula above works only if there are no sales.
If there are sales - as in the case above (actually I would think this is the formula to use all the time, and plug values as needed)
Ending Gross = Beginning Gross + Purchase - Sales - Depr.
136 = 90 + Purchases - 10 - 27
Purchases = 73
And FCINV = Purchase - Sales = 73 - 10 = 63
Gotcha, pretty straight forward and simple. Major oversight on my end.
Follow up question with regards to an unusual sale of an asset…
In the above question, when we eventually go to calculate FCFF, do we adjust NI to reflect the sale?
Thanks
NI already includes the Sale proceeds.
Remember from Level I - that you would deduct Gains from Sale to arrive at CFO using the indirect method.
reason - NI includes Sale.
So does CFI,
So while calculating the Cash flows to the firm - you would be double counting the effect of the Sale.
Thanks very much for the clarification!
I still don’t get this. The answer says that FCInv=55.
You’re getting 63
I feel that whenever there is a sale involved, we need to work with the gross amounts and depreciation should not be considered at all.
Historical value of sold asset was 19. Asset was sold for 10 and the current book value is 2. Thus we do the follows-
PPE purchases = Gross End. PPE + Sale - Gross Beg. PPE = 136 + 19 - 90 = 65
Now we should subtract the sale proceeds of 10 to this to get net FCInv = 65-10 = 55
Seems right?