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Dear John,
I am referring to a past paper Question Vogel Co, which is Question no 3 examined in jun 2014.
John my question is regarding the calcuation of the Free cash flow of Ndege Co, The question states that “Ndege Co can claim 10% tax allowable depreciation on its non-current assets. It can be assumed that the amount of tax allowable depreciation is the same as theinvestment needed to maintain Ndege Co’s operations” but when I was checking the examiners answer the examiner has deducted the tax allowable depreciation from the PBIT instead of first adding it back and then deducting it. I also referred to your lectures and you have also first added the depreciation and then deducted it.
Can you please explain why did the examiner do this
Regards
SaroshTAD is always subtracted in order to get the taxable profit on which the tax is calculated.
In Paper FM, we then add back the TAD because it is not a cash flow.
However the Paper AFM examiner always assumes that an equal amount is needed to maintain the operations, and this would be a cash outflow. Therefore we do not bother adding back the TAD.I don’t know which lectures you are referring to, but I specifically mention this in my lectures on investment appraisal.
But the depreciation of 10.1m why are we jot adding it.. because in the formula if FCF qe add back depreciation. Is it because we do not know the exact division of it ?
Please read the second paragraph of my previous reply carefully, because I explain why it is not added back.
In this there are two depreciation that is TAD and the normal one. So the 10.1 is the normal deprecistion and why are we not adding back when we calculate fcfe. I understood the tad part.
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