Duff & Phelps Interview Question: What is WACC? What happens to... | Glassdoor

Interview Question

Valuation Analyst Interview

What is WACC? What happens to DCF model if u increase

  depreciation expense? Why?

Interview Answer

4 Answers


Nothing. Depreciation and amortization are not included when calculating revenue and subsequently free cash flow because these are non-cash charges. For more information, see http://www.investopedia.com/university/dcf/

Vladimir Ryazantsev on Mar 21, 2012

Depreciation is a non-cash expense. However, increasing depreciation reduces the tax the company pays. If you only increase depreciation, free cash flow is higher due to tax savings. However, if projected depreciation increases you should examine why. Depending on the explanation, it may be necessary to adjust projected capital expenditures which would act to reduce cash flow.

Abe Froman on Jun 20, 2012

DCF Is discounting the future free cash flow to present value and the free cash flow means operating income minus operating expenditure. Depreciation is one type of operating expenses so any increases in operating expenses reduces cash flows. So it reduces the DCF. Although, in case of Real Estate, instead of earning we use fund from operation (FFO) which excludes the depreciation cost, because real estate rarely decrease in value over time and it usually appreciates. So it doesn’t have any effect on the DCF for Real Estate.

Anonymous on Nov 24, 2015

DCF will increase because free cash flow calculation requires the new addition of this depreciation expense.

Anonymous on Jan 14, 2016

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