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Discounted cash flow techniques (part 3) – ACCA (AFM) lectures

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  1. In example 4, why wasn’t there a balancing charge/allowance in time 5 like in the previous examples?
    Was it because the investment was in an operation and not a non-current asset?
    Or was it because the operation was not sold/disposed off in Year 5 so there wasn’t a balancing charge/allowance?
    Or was it due to the straight-line method which doesn’t produce a balancing charge/allowance?

    • It is because the question said to use 20% straight line tax depreciation together with the fact that there are no sale proceeds. So using the same tax workings as normal results in no balancing change or allowance.

      • It arises when the asset is disposed of, whether or not there are any sale proceeds. (If it is simply ‘thrown away’ then effectively the sale proceeds are zero, and so there will be a balancing allowance of any remaining tax written down value).

        As far as the exam is concerned, the residual value is taken to be the sale proceeds.

  2. Hi Mr Moffat,

    This is about rounding and rather that typing numers in the CBE versions of the exams, actually using the formula capability of the spreadsheet tool.

    Feels like the mark schemes are rounding before the calculations are done.

    Do you have any advice, its much quicker and more correct in practice if you dont round a number before calculating.

    This problem naturally becomes greater as time periods increase and rely on previous numbers.

    Best,

    Birju

    • It doesn’t matter whether you use the exact figures or whether you round them (usually to the nearest thousand) unless obviously the question specifies differently.

      The marks in Section C are for the approach rather than for the final answer (and nobody cares either in the exam or in real life about a difference of a few hundred).

    • It is a reasonable point. However this is something that the current examiner has in almost every NPV question. The depreciation itself is not a cash flow but given that there is an equal amount spent on maintenance it is correct to subtract the amount as a cash flow. There is an argument for subtracting both to get the taxable profit, but the examiner never does in his answers.

    • Yes they are all relevant. The 20 marks for professionalism is not technical learning. It is dealt with in a chapter in our free lecture notes which also contains links to relevant resources on the ACCA website.

  7. Hi sir. Thank you for the lecture. Please may I ask, if the NPV is only +1, or +2, which is a small positive figure (very near to zero), is the project still acceptable by the company? Or is there any other comments regarding this?

    Thank you.

  8. Hi Sir. Thanks for the great lectures. Although, may I ask. Why are we deducting the TAD before the taxable CF, instead of adding tax benefit after paying the taxes? Deducting 1000 depreciation every year would reduce the CF by a thousand. Isnt it actually an amount that is allowed for the tax purposes only? Depreciation is irrelevant for CF isnt it?

  9. Good day Mr. Tutor

    With the exams these days taken online using the computers, can we use the calculation options of formulas that the spreadsheet enables, such as =NPV() & =IRR() when calculating NPV etc. or do we still have to use the tables.

    Please advise if this is possible or will we lose marks?

    Thank you

    • In Section C questions you should indeed use the NPV and IRR functions in the spreadsheet (as explained in the final chapter of our free lecture notes). You would not lose marks if you do not use the NPV and IRR functions but it would mean spending more time.
      However for Section A and B questions it is still important that you understand the NPV and IRR.

  12. Hi Sir, thanks very much for the great lecture.
    But I have this little problem. The statement didn’t say the tax treaty between UK and Oblivia is for royalty only, why did we not apply the treaty to Revenue?

    Thank you Sir

  13. Sir,
    If net cash will not be remitted to the UK then what will be the effect on the calculation of NPV? Secondly why we are deducting royalties above as we are making calculations from James Plc’s point of view. Please advise.

    • If the cash was not remitted then it would be re-invested in Oblivia. This would earn more cash and at some stage there would be a remittance. If James was never going to be able to get any cash remittance they would not have invested.

      The royalties are allowed for tax in Obvlivia but are taxable in the UK – the tax rates are different.

  14. Hi

    In the Oblivia project, why weren’t the Maintenance costs also deducted before taxable profits as this is a tax deductible expense and therefore reduce the tax liability? Then after tax calculation, add back the TAD? Although the cash flows would still net off, the tax liability would be different?

    Thanks

    • Nevermind, I have read through the previous comments and realised you have already answered this question. Although I still don’t understand why, I will take the advice from your replies.

      Thanks 馃檪

    • They pay 20% tax in Oblivia to the Oblivian tax authorities.

      In the UK they pay 25% tax, but because of the double taxation treaty they get credit for the 20% already paid in Oblivia and so just pay an extra 5% to the UK tax authorities.

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