Free Cash Flow to the Firm Thank, interest, computing, like

bleach

Study Session 12, Reading 41.

The formula is FCFF = NI + Dep + Int(1-t) - FCInv - WCInv

In computing FCFF, why do you add back the full value of depreciation expense and not the after-tax value (like interest expense)?

Thank you for your help.

jarobi04

also another way to think about it...

differing companies may have different levels of debt / different interest payments. if you add back the After-tax interest to the calculation - it becomes more comparable across companies.

CP

Kapie

Unliever is right, unlike interest, depreciation is subject to different rates for tax and accouting purposes. If depreciation for both tax and accouting purposes is the same, the tax benefit is already built into Net Income. Otherwise, the difference is recognized by working capital adjustments (increases/decreases to DTA or DTL).

DSquaredSlim

Just imagine if you own the whole firm and do not have any bonds then you would pay tax for the interest. That is the reason you only save 70% of the interest and not in the case of depreciation.

genuinecfa

I pay interest of $10 million. Assuming a 30% tax rate, i reduced my taxes by $3 million (for a net cash interest expense of $7 million). Therefore, i add back my net interest expense ($7 million) to get to FCFF

I record depreciation of $100 million, which reduces my taxes by $30 million. I must add back the entire $100 million, because it was a non cash expense, and I'm trying to arrive at a cash number.

SpyAli

when you get NI, you deduct the full amount of Dep.

so you have to add full amount of Dep. don have to consider the tax.

economicz

its 1) non-cash 2) if acquired, the mgt can change depreciation and affect taxes, at least my opinion

Pegasus2008

That's how I see it too.

defour44

Because depreciation has already tax sheltered your income (you deducted it already in determining NI), and the remaining amount is entirely non-cash.