Topic Breckhall (Kaplan)

Hi,
I want to ask you about the treatment of interest charges in tax calculations.
Are interest charges taken into account when calculating tax?
I understand that interest charges are excluded from cash flows, but they are still tax-deductible, right?
The question Breckhall in Kaplan states a line of interest (beside other “conventional” expenses like labour, material, overhead..) but this is omitted when calculating taxation.
I’m quite sure there is not any information in the question stating that Interest is not tax deductible

Pls kindly give me an explaination on this.

Assume that you have been appointed finance director of Breckhall Co.
The company is considering investing in the production of an electronic
security device, with an expected market life of five years.
The previous finance director has undertaken an analysis of the proposed
project; the main features of his analysis are shown below.
Proposed electronic security device project:
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
$000 $000 $000 $000 $000 $000
Investment in
depreciable non-current
assets 4,500
Cumulative investment
in working capital 300 400 500 600 700 700
Sales 3,500 4,900 5,320 5,740 5,320
Materials 535 750 900 1,050 900
Labour 1,070 1,500 1,800 2,100 1,800
Overhead 50 100 100 100 100
Interest 576 576 576 576 576
Depreciation 900 900 900 900 900
–––– –––– –––– –––– ––––
3,131 3,826 4,276 4,726 4,276
–––– –––– –––– –––– ––––
Taxable profit 369 1,074 1,044 1,014 1,044
Taxation 129 376 365 355 365
–––– –––– –––– –––– ––––
Profit after tax 240 698 679 659 679

All of the above cash flow and profit estimates have been prepared in
terms of present day costs and prices as the previous finance director
assumed that the sales price could be increased to compensate for any
increase in costs.
You have available the following additional information:
1 Selling prices, working capital requirements and overhead expenses
are expected to increase by 5% per year.
2 Material costs and labour costs are expected to increase by 10%
per year.
3 Tax allowable depreciation (tax deduction) is allowable for taxation
purposes against profits at 25% per year on a reducing balance
basis.
4 Taxation of profits is at a rate of 35% payable one year in arrears.
5 The non-current assets have no expected salvage value at the end
of five years.
6 The company’s real after-tax discount rate (or weighted average
cost of capital) is estimated to be 8% per year and nominal after-tax
discount rate 15% per year.
7 Assume that all receipts and payments arose at the end of the year
to which they relate except those in year 0 which occur immediately.
Required:
(a) Estimate the net present value of the proposed project.
(b) Calculate by how much the discount rate would have to change
to result in a net present value of approximately zero.