FCFE and the sale of an asset

CFA Level II Equities
#1

If the only activity through the year is 1) we sell a machine for 100 cash, and 2)we spend 50 cash on a new machine. What would be the effect on FCFE? Isn’t capex only 50? Does the positive cash flow from selling machinery make FCFE go up?

Thanks,

#2

Yes, the capital expenditure would be 50 only unless the company incurs some gain or loss while selling the machine as tax has to be paid on that amount. Otherwise, it would increase the FCFE.

But of course, it is not a sustainable source of cash flow as the company simply cannot keep on generating cash flows by investing activities. That’s why cash flow from operations are considered more important.

#3

To be clear, CapEx is a 50 _ inflow _: 100 inflow less 50 outflow.

#4

ahh yes…thank you! i think i was working under the assumption ‘capex’ (when we use it in the FCFE and FCFF formulas) was simply the firm’s expenditure that year on fixed assets…I think you cleared it up- really what we want in that formula is NET capex…

thanks!

#5

Yup: net.

You’re quite welcome.