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Dear Tutor,
i have noticed that in some answers to Exam questions on Advanced Investment Appraisal (Question 1, December 2013) , Tax allowable depreciation was deducted before tax and later added back, for tax savings/ shied.
While in some other questions, Tramont Co. (Sample exam question), same tax allowable depreciation was deducted before tax but was not added back.
Any reason for the differences in treatment of Tax allowable depreciation in the two(2) scenarios above?
Please help.
In future you must ask in the Ask the Tutor forum – this forum is for students to help each other.
There are two ways you can deal with tax.
Either you subtract depreciation, then calculate the tax, and then add back the depreciation because it is not a cash flow.
Alternatively, you can calculate the tax ignoring depreciation, and the bring in the tax saving on the depreciation.
Both ways end up giving the same answer and generally the second way is the easier.
However, the one time you have to do it the first way is if there are losses, because any taxable loss is carried forward against future taxable profits.
Thank you very much sir.
i have also noted your concern on the appropriate forum to ask Tutor questions
Oops! point noted. I too could have fallen into that trap thanks for clarifications.
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