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Could you correct me if i’m wrong?
After calculating the tax relief on tax allowable depreciation TAD separately, and offsetting the loss in year 1 against profit in year 2 ,
For yr 1 , net cashflows in GR= 400 where
taxable profit 0
tax at 20% 0
Add tax relief on TAD 4000
Less incremental working capital (3600)When calculating the tax relief on TAD separately and offsetting loss,i do not get the same NPV as examiner’s anwer.
Thank you in advance for your clarification!
They only get the tax saving on the TAD provided that there are sufficient profits from the investment or from elsewhere.
Here, the only profits they can set off against are those from the operation in Gamala, which are not sufficient to cover the TAD. Therefore there is no alternative but to do what the examiners answer has done (which is what BPP have copied) and calculate the tax separately. The taxable profit is the operating profit less the TAD. Since this results in a loss in the first year, there is no tax payable and the tax loss is carried forward to the following year.
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