- This topic has 2 replies, 2 voices, and was last updated 1 year ago by
.
- Posts
Problem 2 march/june 2018 ask about :”Calculate the adjusted present value for the investment on the basis that it is financed by the subsidised loan and conclude whether the project should be accepted or not. Show all relevant calculations.”
Scenario related to the question contain the following:
“…The new investment will require immediate expenditure on facilities of $30·6 million. Tax allowable depreciation will be available on the new investment at an annual rate of 25% reducing balance basis. It can be assumed that there will either be a balancing allowance or charge in the final year of the appraisal. The finance director believes the facilities will remain viable after four years, and therefore a realisable value of $13·5 million can be assumed at the end of the appraisal period…”
I want to ask in the sample answer for Problem 2 march/june 2018: Why there is no reference to the “Tax allowable depreciation”, in other words, why there is no deduction of “Tax allowable depreciation” in arriving to the taxable profit to calculate tax, and then add back “Tax allowable depreciation” to calculate the projected cash flows for each year?
Thank youI want to correct my question : Why there is no reference to the “Tax allowable depreciation” in calculation of cash flow, in other words, why there is deduction of “Tax allowable depreciation” in arriving to the taxable profit to calculate tax, but then there is no addition of “Tax allowable depreciation” back to calculate the projected cash flows for each year?
Thank youIt is because the tax has been calculated separately in workings 1, and in arriving at the tax flow the TAD’s have been subtracted. Given that they have not been subtracted in the main cash flow calculations there is nothing to add back.
As I do explain in my free lectures, it is better to do it this way in Paper AFM because often there are tax losses (as in this question) which need to be carried forward and offset against future taxable profits.
- You must be logged in to reply to this topic.