investment appraisal

Hi John,

I was reading the ACCA technical article ‘Advanced investment appraisal’ and found some of the wording confusing:

“Fixed appraisal horizon
Sometimes directors of a company will only appraise projects across a set time horizon, which will not be the full length of the project and so does not include all of the cash flows. If a four-year time horizon is used, then the tax effects of the fourth year must be taken into account, even if tax is paid in arrears and the cash flows arise in the fifth year.”

This is the sentence that confuses me:

“If a four-year time horizon is used, then the tax effects of the fourth year must be taken into account, even if tax is paid in arrears and the cash flows arise in the fifth year.”

Do they mean that the tax effects of the fourth year (the third year tax due now- one year later) only OR do they mean the arrear for the fourth year (which will be paid in the fifth year)?

I would appreciate your help.