COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Which of the following adjustments should NOT be made when computing free cash flow from Incremental earnings?
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adding depreciation
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adding all non-cash expenses
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subtracting increases in Net Working Capital
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subtracting depreciation expenses from taxable earnings
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Explanation:
Detailed explanation-1: -subtracting increases in Net Working Capital.
Detailed explanation-2: -What adjustments must you make to a project’s unlevered net income to determine its free cash flows? You must add depreciation back (because it is a non-cash expense) and subtract capital spending and the change in working capital.
Detailed explanation-3: -Depreciation charges should not be included in the incremental cash flow calculation.
Detailed explanation-4: -Increasing depreciation expense results in a decrease of the incremental after-tax free cash flow. The initial outlay of a project may be reduced by the after-tax salvage value of replaced equipment.
There is 1 question to complete.