- This topic has 5 replies, 3 voices, and was last updated 9 years ago by
.
- Posts
Sir just wanted to know in part (a) why activity based cost are not included for tax calculation purpose.From revenue only direct cost,redeployment of labour is taken and that gives taxable cash flow.And depreciation is also not included is it because depreciation is not in cash flow item am I correct. Thanks
Since they are activity based, they must have been absorbed into different products/projects from an existing fixed total.
It is assumed that the total remains the same with or without the project and are therefore not relevant.
Depreciation is never relevant, because it is not a cash flow.
(Instead, when there is tax involved, we have a tax saving due to the capital allowances.)
In Neptune as financial side effect in the APV, the tax relief is calculated on the basis of gross capital: 800/0,98=816 (before transaction cost). However in Burung the same calculation is made on the basis of netto capital (after the transaction cost) 42,97. Why there are 2 different approaches for the same situation?
The tax effect is on the interest paid, which is based on the amount of debt raised.
How much debt is raised depends on whether the issue costs are payable out of the debt actually raised (in which case it will be that bit more than what is needed for the investment) or whether it is paid out of existing cash balances (in which case the debt raised is equal to the amount needed for the investment).
The wording in both of the questions does not make it clear where the issue costs are being paid from and so different assumptions have been made (it was a different examiner in the two questions).
Unless the wording makes it clear, then it doesn’t matter which you assume (even though obviously the answer will be a little different). In P4 questions (certainly in question 1) there is rarely just one correct answer – it depends on assumptions, and provided you state your assumptions (and then do the calculation correctly based on your assumptions) you still get the marks.
- You must be logged in to reply to this topic.