Why is FCF equal NOPLAT - Net investments? Don't you have to add depreciation and amortization since NOPLAT is EBIT(1-T)?
You do have to add depreciation. But sometimes it is netted against capital expenditures. Free cash flow equals gross cash flow (NOPLAT plus depreciation) minus gross investment (capital expenditures, increases in working capital and other operating assets). If you net depreciation against capital expenditures, free cash flow can also be calculated by subtracting net investment (gross investment less depreciation) from NOPLAT.
What does Gross investment refer to (answers included)?
Here's your answer... 2. net investment plus replacement investment When item depreciates, over long term you will replace it and therefore total depreciation equals replacement cost, or replacement investment in this case. This assumes you are adhering to an unchanging and sustainable business model. Typical example is a single machine unit on a production line ... it depreciates to $0 in value and is basically worthless, you replace it with a new one at the same price of the original one.
What is the net investment tax?
In the USA, married couples whose income exceeds $250,000 during the year must pay Net Investment Income Tax.Single people whose income exceeds $200,000 during the year also must pay Net Investment Income Tax.Individuals with less income do not pay Net Investment Income Tax. Nonresident aliens also do not pay Net Investment Income Tax.Gross Investment Income includes interest income, dividend income, capital gains, rental and royalty income, non-qualified annuities, passive business income, and gains from the sale of investments.Investment Income minus investment interest expense, investment advisory fees, brokerage fees, rental and royalty expenses, tax preparation fees, and related state and local income taxes equals Net Investment Income.Investment income does not include sale of a primary residence, wages, unemployment compensation, non-passive business income, social security benefits, alimony, tax-exempt interest, self-employment income, and most retirement plan distributions.When it must be paid, the Net Investment Income Tax rate is 3.8% on Net Investment Income.(By income, I mean Modified Adjusted Gross Income, which is the same as taxable income for most folks.)Questions and Answers on the Net Investment Income Tax
What is a net investment?
An Investment is said to be made when an entity purchases Capital assets like Land & Building, Plant & equipment, or other durable assets which has a useful life greater than 1 year.The price paid for acquiring such assets plus expenses incurred to put them in operation denotes Gross investment.Net Investment is equal to Gross Investment minus Depreciation (non-cash)This helps the investors to know which assets need to be replaced in near future. At a overall level a positive net investment signifies that assets are increasing in Balance sheet so the scope for returns goes up.
What is the difference between investment and capital formation?
Let me try to answer in a very basic way. What is a capital: capital is anything tangible or intangible which increases prodctivity. Examples of tangible capital are machines, buildings, office space, computers etc. Examples of intangible assets are human capital (how trained and educated people are), social capital (availability of equal opportunities etc).Now in an economy, putting money with intention of having higher returns is called investment. The returns can be monetary or otherwise. For example, social investment would include spending money to make lives of other better.Investment also includes for example investing in fixed deposits, bonds etc. Now, all investments may not lead to capital formation. For example, if you are a bank and you give loan to someone to buy a TV or a car may not lead to capital building in the economy (though it will fetch you interest income). The commodity bought using the money will not "produce" more money or profits for the economy but will only depreciate. On the other hand, A loan given to an infrastructure company to build a road may be counted as capital formation as other industries will be supported by better roads and employment will be generated too. The roads will increase the productivity of the economy now and also in future.Ps: many economy scholars also argue that giving loans to buy comsumption items is indirectly capital formation too. For example buying a TV makes people exposed to media and information. This creates a better human capital.On a side note: this is why pragmatic economic approaches advocate for directing our investments towards capital formation and not towarda comsumption items.
What is the relationship between saving and investment?
To understand that, you have also to understand the relationship of these concepts with consumption.So consumption represents the final use of a good or service, in other words, consumption means that the resources allocated for that purpose are not allocated anywhere else (“Consumption is destruction” Karl Marx).Saving is a process by which you are not using all the resources to which you have a claim to, meaning that they can now be used to other purposes like investments.When consumers make the decision to save, what they are doing is to make a decision of postponing consumption, because they value consumption in the future versus the present. By putting their savings into a bank, this will increase the supply of money available, meaning that the price of borrowing it will be lower, i.e, interest rates will be lower. And this is where the inter-temporal function of interest rates come into play. By saving now, consumers are saying that that want to consume in the future, through the price (of money) mechanism. Now since managers and entrepreneurs are interest rate sensitive, when interest rates decline, they see this as an opportunity to start investing in long term investment projects.The story is that when finally consumers use up their savings, these investment projects have already been made and can be used to satisfy consumer needs.You can look at it from two perspectives, (1) the real economy, whereby you use actual goods and services, and (2) and the money part of the story.All-in-all savings represent those resources that are not consumed, and can therefor be used in investment projects.
How do I calculate Gross value added?
Gross Value Added is a parameter which is more relevant in macroeconomic terms. In Macroeconomics, Gross value added is a productivity metric that measures the contribution to an economy, producer, sector or region.It’s simple formula is-Gross value added = GDP + subsidies on products - taxes on productswhere GDP=GDP = private consumption + gross investment + government investment + government spending + (exports - imports)However, looking at the numerical to which you are seeking the answer, I think you are considering GVA at a company level. At this level, GVA reveals about the value added by the products and services of a firm. Simply put, GVA tells the contribution of the firm’s products and services in monetary terms to meet the fixed cost.Thus, the formula becomes-GVA= Sales + Income from other services - cost of raw materials - cost of production - cost of services availed from outside supplier (if any).Therefore, answer to your numerical becomes-$1540-$455-$229= $856Since any other information is not given, I have assumed any other cost is not incurred in the production. Thus, $856 is the bottom-line profit of the firm.However, there’s another metric called as NVA or Net value Added which is more robust in terms of revealing the actual bottom line profit. Gross Value Added or Total Value Added reports depreciation along with retained profits. GVA shows that depreciation is also available for reinvestment in addition to the retained earnings and reserves for the maintenance and expansion of the company. Whereas, in case of NVA, depreciation is treated as expenses and therefore denotes that it is not available for re-investment purpose by the enterprise which obviously makes more sense.All the major firms prepare the GVA and NVA statements in the following manner-Image Source: www.aubsp.comHope I could solve your query.
What's the difference between working capital and net working capital?
A business’ working capital can be divided into current assets alone and the same minus current liabilities. The gross working capital refers to the assets or the company’s total financial resources. Whereas, a company’s the net working capital is its total resources minus its financial liabilities.Gross working capital – It is the total asset including cash, receivable accounts, short-term investments, inventory, and marketable securities. It is a limited account of an establishment’s financial standing.Gross working capital is an important measure to maintain during a company’s working capital cycle. Only a handful of companies enjoy steady revenue throughout the year. Substantial financial support should be conserved through the life cycle of working capital.Net working capital – Net working capital is a more comprehensive assessment of a company’s financial condition. It is calculated after subtracting a company’s liability from its total assets. It can vary whenever an establishment avails some kind of debt or falls short on accounts payable.Generally, a 2:1 ratio of current asset and current liability is considered ideal to maintain a company’s financial stability. To do that, the business owner should know what is a working capital cycle and when they should prepare in advance for financial advances.