Relevant cash flows for DCF Taxation (example 4) – ACCA Financial Management (FM)
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Or more to the point, sir
How do we calculate the balancing charge or balancing allowance where tax is paid in the year where profit is made?
The balancing charge or allowance is calculated in the same way regardless of when the tax is paid. If the tax is paid in the same year then the tax saving or extra cost is in the same year. If tax is paid in the following year then the tax saving or extra cost is in the following year.
Oh! Thank you so so much, sir
You are welcome 馃檪
Hi John,
Please how do we calculate the total tax savings in the year of disposal of the asset where the tax is paid in the year in which profit is made?
Hi there again John.
I’m sorry I might be leaving a comment on almost every lecture or practice tests.
This time around I want to ask if I can calculate Capital Allowances and deduct them within the operating profits and then add them back (as they are not really cash items) after calculating the tax charge for the year?
NB : in those years where if we deduct Capital Allowances and end up with Negative before tax Operating Cashflows which if we apply a tax rate will give us a relief to the subsequent taxable Operating Cashflows
Can we do our appraisals with tax relief or we have to calculate the ‘tax saving/benefit’ for every appraisal question?
Yes, you can calculate the capital allowances, deduct them from the operating profit, then calculate the tax and then add back the capital allowances. It gives the same result.
If there was a tax loss the the tax is zero and the loss is carried forward to reduce the following years tax. However this doesn’t happen in Paper FM (it happens occasionally in Paper AFM).
Awesome ,it just that i remembered the Tax Relief from Trading losses from my earlier Tax exam and had imagined such a scenario where there will be Trading losses in a DCF question
Thank you anyways for the clarity.
much appreciated
PS : I personally think its much easier to include the Capital Allowances within the Operating cashflows and then workout the tax and then Add back the Capital Allowances .
This way , i think it will be much clear ti see how much we owe the Tax Authorities in a given trading period.
Hello Sir, seems there is an error in the net cash for year 4. its supposed to be13,463 and not the 13,163 in the video.
3rd year i mean.
Yes it should be 13463 (as is printed in the answer in the lecture notes).
Hello Sir,
I didnt understand the part where we have calculate the capital allowance how did you get the 4,000 amount , the total is 4375 quite now sure where did 4000 came from ?
I do not know where you are getting 4375 from. The allowances are 2,500, 1875, and (385), which is a total of 4,000 (although the total is not relevant but it must be the difference between the cost and the scrap proceeds (10,000 – 6,000) as per normal tax rules).
#Scrap value and not residue value
Hi John!
Thanks so much for another great lecture. I am struggling a bit with the capital allowances and tax savings – I haven’t done TX yet so this is all pretty new to me. I have watched the lecture a couple of three times now, but I’m still confused. I think I understand the idea and calculation of capital allowances, so it is the tax savings concept of this I am struggling with. Would you be able to explain a little bit more?
TIA,
Kim
Sir since we have used the machine because if we do for the third year also (for whole year) and it is sold at the end of the year then why we have not reduced the capital allowance from it and if we do the value of machine at the end of the third year will be $4219 and then we should
calculate the surplus we earned after selling the machine at the end of third year that is $1781 (6000 – 4219) and on this amount may be we should calculate the balancing charge of $534.3 (1781*30%).
So what I am trying to say is that why we have not reduced capital allowance of 25% from the value of machine at the beginning of third year that is $5625 ?
Sir I do not understand why the 240 is deducted from 1000 instead of 800. I thought since 200 of cap allowances is already taken away that only the 800 is taxed. Kindly explain.
The 200 is not a cash flow, it is only relevant for calculating the tax.
The tax is calculated on the 800 which is why the tax is 240.
Please bear with me.
why 1000-240=760? and not 800-240=560?
For NPV calculations we need the cash flows. Only 800 is taxed which is why the tax is calculated on 800. But 800 is not a cash flow, it is the profit. The depreciation is not a cash flow – the cash flow is 1,000. Think back to statements of cash flows from Paper FA (was F3) or whatever exempted you from that exam.
Hi,
I think year 3 is $13,463
that is what I got
Yes it should be 13463 (as is printed in the answer in the lecture notes).
Hi Sir
Why have we taken the 4th year balances in consideration while calculating the NPV. Because I clearly remember in the past, we have ignored the other periods balances even if they were a part of the periods which are asked in the question.
Tax is payable 1 year in arrears and therefore there are tax flows in 4 years time. We never ignore any periods in which there are cash flows!
Hi Sir,
In example 4, if the tax-allowable depreciation on a straight line basis over the three year, the allowance balance will be zero at the end of the year 3, then the scrape value 6000 is taxable which will be a cash outflow at year 3?
If it was straight line depreciation then there would be a balance charge in the third year which would give rise to a tax outlaw one year later i.e. time 4.
Hello sir,
Plz tell me how to calculate present value?
I got it, sir ?
I am pleased you have got it 馃檪
Thank you very much
You are welcome 馃檪
Hey John,
Are there marks to show the working of tax saving on capital allowances? As it’s a bit hard to do the working on excel. Could I do it in rough and just enter the values?
You could, and would still get the marks if your figures were correct.
However it is better to have the workings in the spreadsheet because if you make a mistake you still get marks for your approach (whereas if you have just typed in the figures and they are wrong, then you get zero for that bit).
Thank you John 馃檪
You are welcome 馃檪
Please note that the net cash flow for year 3 should have been 13,463 instead of 13,163 as per presentation.
Thank you – I will have it corrected 馃檨
This video lecture was explicit. Thank you Mr Moffat
Thank you for the comment 馃檪
Hello,
Hows comes we didn’t get the $1,000 working capital back at the end of the project?
Thanks
But we do!!!
It is an inflow at time 3 – the end of the project.
I suggest that you watch the lecture again 馃檪
Apologies, Im an idiot haha
No problem 馃檪
How to deal with taxable losses if you use TAD instead tax relief ? Many answers to exam type questions deduct TAD & add it back but you may make a taxable loss becasue TAD so high
In Paper FM we always assume that the company is already making sufficient profits and paying tax. Therefore a ‘loss’ from the new project simply reduces the existing profit and therefore saves tax for the company – there is no tax loss.
Hello,
I hope this is not a silly question. How come the scrap/sale of the asset does not go in the cash flows subject to tax?
If you look at the calculation of the capital allowances, you will see that that is where the sale proceeds of the asset are dealt with.
Hi John,
Im hoping you are well!
I have worked out Example 4 and seem to have the correct flows and allowances of what you have wrote down but when i add all the net present values up I get to a total of $7101.84 or $7102 rounded up but in the lecture you have $6877 & the answers in the notes is $6695. Is there something I’m doing wrong?
I look forward to your reply.
Dear shanekenno
No! there is nothing wrong you did.
Total Net Cash Flows for 3rd year $ 13463 but mistakenly written as $13163.
Best Regards