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Hello John
I am completely flummoxed by the answer given in the BPP revision kit.
A couple of things that are confusing:
1. TAD is not deducted before arriving at taxable cash flows. Nor has it been added back later on.
2. Capital allowances are added after calculating tax. But, instead of adding 650, they have added 163 each year, which is the tax benefit (650*25%).
Can you please explain why they’ve calculated it like this?
I spent a considerable amount of time searching this forum and trying to figure out why the calculations are done in this manner, but I found nothing. I did, however, find the examiners’ answer to this and that was much more clear cut. But I would still like to know why BPP calculates it differently.
I do not have the BPP answer – only the examiners own answer which you appear to be happy with.
As I explain in my free lectures, in Paper AFM it is much safer (because of extra complications that can occur) to calculate the tax separately as in the examiners answer.
From what you have written, I would guess that BPP have calculated the tax on the net cash before TAD (so at time 1: 690 x 25% = 172.50) and then added the tax saving on the TAD (650 x 25% = 162.50) which is bound to give the same net figure for the tax.
However, again it is safer in AFM to do as is in the examiners answer.
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