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Dear Mr. John,
First of all I would really thank you for your lectures that are very helpful and handy in the ACCA preparation journey, i really hope to grow up to be a very smart and successful person like yourself.
Second.
My question is in the online lecture of CHMURA CO (DEC 13) you have mentioned that if we tried to calculate the tax amount either by directly calculating it from the resulted cashflows pretax then adjusted for the TAD it would result in the same amount like wise if we used the method you have calculated it (Deducting TAD then adding it back again).I tried to do so just to clear my mind from the confusion and made the below calculation but am missing something in it and it is showing differences between the two ways calculation, can you kindly clear my doubt?
First method (Your calculation):
After tax cashflows (MP) 127,854,412 500,277,137 1,194,026,030 1,005,199,117 598,906,582Second calculation (Other method):
Taxable profits/(loss) 128,805,882 625,369,516 1,550,368,041 1,298,598,823 715,208,776
Tax @ 25% (32,201,471) (156,342,379) (387,592,010) (324,649,706) (178,802,194)
Add: TAD 125,000,000 125,000,000 125,000,000 125,000,000 125,000,000
Balancing allowance 125,000,000
After tax cashflows (MP) 221,604,412 594,027,137 1,287,776,030 1,098,949,117 2,486,406,582Diff. – 93,750,000 93,750,000 93,750,000 93,750,000 187,500,000
Thanks in advance for your kind help.
You can either calculate tax on the operating cash flow before TAD and then calculate the tax saving resulting from the TAD.
Or, you can calculate the tax on the cash flow after subtracting the TAD and then add back the TAD because it is not a cash flow.
In what you have labeled as ‘other method’ the 128,805,882 at time 1 is the operating cash flow before TAD and the tax on this is 32,201,471. There is a tax saving from TAD of 125,000,000 x 25% = 31,250,000. So the net cash flow is 128,805,882 – 32,201,471 + 31,250,000 = 127,854,411. There is nothing to add back because the TAD had never been subtracted in arriving at the operating cash flow.
If you are still unsure then do look back at the Paper FM (was Paper F9) lectures on investment appraisal with tax 🙂
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