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Answer: depreciation.
## Explanation The correct formula for FCFF (Free Cash Flow to Firm) is: FCFF = CFO + Int(1 - Tax Rate) - FCInv Where: - CFO = Cash Flow from Operations - Int(1 - Tax Rate) = After-tax interest expense - FCInv = Investment in Fixed Capital **The error is in the treatment of depreciation.** Depreciation is already included in the calculation of CFO, so adding it separately would result in double-counting. When calculating CFO using the indirect method, net income is adjusted for non-cash items like depreciation. Therefore, adding depreciation again would overstate FCFF. **Correct approach:** Depreciation should not be added separately because it's already accounted for in the CFO calculation.
Author: LeetQuiz Editorial Team
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An analyst estimates a company's FCFF by summing cash flow from operations, depreciation, after-tax interest expense, and then subtracting the investment in fixed capital. An error is made in the computation regarding the treatment of:
A
depreciation.
B
interest expense.
C
investment in fixed capital.
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