How is Depreciation and Amortization treated in Discounted Cash flow DCF?



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in d.c.f module in quiz last qustion you have asked what is need to be done of dep and amortn for calculating d.c.f
first option- d&a is added to ebitda
second option- d&a is subtracted to ebitda
third option- d&a is not included in calculation
as per your correct answer its second option which is d&a is subtracted from ebitda

but in my opinion d&a should be added to ebit( not ebitda)to calculate dcf so first option is certainly incorrect because there given added to ebitda

then second option you have fixed it correct as d& a subtracted to ebitda. in my opinion ebitda in itself explains earnings before dep and amortn then whats is the need to subtract again d&a to dcf ,it would be wrong;it could be correct if first you subtrat and then add back dep to ebitda which is not needed certainly so

third option is d&a not included in dcf calculation is correct in my opinion ; if ebitda is given

2 Answer(s)


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In EBITDA - (D&A) expenses are already present. So you cant add D&A again to EBITDA.

We subtract D&A from EBITDA to get EBIT and hence we remove the non-cash expense from EBITDA. Now with EBIT we have only cash expenses and hence a better reflection of the cash flow of the company.

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i dont agree with your answer because the whole purpose for what d&a is considered to arrive at is to get free cash flow to discount it to arrive at E.V.
NOW EBITDA Means all cash derived(left) from operations of business after paying operating expense but from that we have not paid interest, tax, and d&a not yet deducted to get net income,
if we deduct d&a then also cash would remain same because d&a is book entry and we will arrive at EBIT,
NOW from this EBIT if we want to come at free cash flow we have to add back d&a to get actual cash flow, now from this capex during the year deducted and increase in working capital lessened, if decrease in w.c added to arrive at free cash flow.
so we saw above when we start from ebitda we first less d&A and then afterwards add so effect is null, so there is no need to consider d&A when ebitda is given. but if question or facts given starts with ebit(i.e earning before interest and tax but after deducting non cash d&a) then we add noncash expense d&a to arrive actual cash flow then we consider capex and w.c to arrive at free cash flow
i hope binny sir you got the point from above explanation am i right i want your reply asap
gnt. sir