How is depreciation treated in discounted cash flow



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hi binny,
in the discounted cash flow chapter, plz explain the last question in the quiz.
in the video, you say that the depreciation and amortization is added back while calculating the dcf as its a non cash expense.
but the correct answer for the last question in the quiz is "subtract d&a from ebitda".
plz clarify this.
thanks

1 Answer(s)


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Typically when you take Operating Income / EBIT you have already subtracted D&A from it and hence its not a true representation of Free Cash Flow, since D&A are non-cash expenses. So to get true FCF you add back the D&A to the EBIT.

The quiz question asks "How is Capex treated while calculating DCF?" - to get to FCF, Capex is indeed subtracted from EBITDA. At a basic level FCF = EBITDA - Capex.

Capex is cash spend this financial year on machinery etc
D&A is expensing cash spend in previous periods.