- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
Dear Sir
With regards to the example 4 in your lecture regarding Inflation in DCF why do we not restrict the capital allowance tax saving to the actual tax liability for the year ? In the example the excess tax saving is increasing the net cash flow figures. For example the first tax liability is £100 with capital allowance tax saving of £175 this has created an extra cash flow of £75 but we don’t physically get a tax rebate of the £75 as we haven’t actually suffered this amount . I understand we might b able to offset this excess £75 against tax from other profits but how do we know there is other profits when preparing a cash flow and isn’t it best to be cautious ??We always assume that the company is already making profits elsewhere and is therefore paying tax. Therefore there is no tax loss resulting from the project – it simply reduces the existing profit and therefore saves tax. (The company pays tax on total profits, not on individual projects)
It is an assumption, but is one that we always make.
- You must be logged in to reply to this topic.