FCFF from NI and CFO

[coritani]

Hi everyone,
I see everywhere these two formulas :
FCFF = NI + NCC + Int * ( 1 – T ) – Inv LT – Inv WC
FCFF = CFO + Int * ( 1 – T ) – Inv LT
According to these formulas, CFO = NI + NCC - Inv WC
But if there is a extra gain on sales from land in NI, then CFO = NI - gain on sales + NCC - Inv WC
So to their formula is WRONG, right ?
thanks

 

[S2000magician]

The gain on the sale of land is added to FCInv to get the cash flow from investing in long-term assets.
The formula’s OK.

 

[coritani]

S2000magician wrote:
The gain on the sale of land is added to FCInv to get the cash flow from investing in long-term assets.
The formula’s OK.

I agree with what you said, as it is exactly the difference between the two equations :
So in the first equation :
InvFC(1) = Delta Book value PPE (book value of the purchase - book value of the sold asset)
And so : FCFF = NI (with gain on sales) + NCC + Int * ( 1 – T ) – Inv WC - InvFC(1) (with no gain on sales)
And in the second equation :
InvFC(2) = Delta Cash value PPE (price of purchases - price of sales)
And so : FCFF = CFO (with no gain on sales) + Int * ( 1 – T ) - InvFC(2) (with gain on sales)
What do you think ?

 

[Harrogath]

Forget about the gain as your main target, remember you are calculating cash flows.
NI includes the gain on the land sold because it is how gains are accounted.
By the indirect approach for calculating cash flows we start from NI that includes cash flows and deferred incomes and losses. So we erase those deferred items like depreciation, amortization and gains and losses from transactions made during the period.
When you sell an asset you have 2 things: the gain or loss from that transaction and the cash received for the sale. The cash received from the sale will go to investing cash flow (CFI) which is the sum of book value of asset + gain. If you don’t substract the gain from NI when calculating CFO, you are double-counting the gain. Since CFO is different than CFI you must correctly make the adjustment to avoid this.