easy · Investment Banking valuation-core

When calculating Unlevered Free Cash Flow (UFCF), why is Depreciation and Amortization (D&A) added back to tax-effected EBIT?

1. Because D&A is inherently a levered accounting metric that must be stripped entirely from EBIT to reach unlevered cash flow.
2. To account for the actual cash spent purchasing new equipment and fixed assets during the current year.
3. Because D&A is a non-cash expense that was subtracted to calculate EBIT but did not involve an actual cash outflow.
4. Because D&A generates a tax shield that increases the company's mandatory cash interest payments to lenders.

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