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Dear Sir,
In the question 28 Fubuki (12/10) in BPP revision kit, in their answer for part b, they say that the assumption made in the calculation of part (a) include “the annual reinvestment needed on plant and machinery is equal to the tax allowable depreciation”. Accordingly, I understand that when this assumption is made, we need to subtract the CAPEX from the taxable cash flow (when the tax on taxable cash flow (revenue – variable cost – fixed cost) and the tax allowable depreciation benefit are calculated separately). However, it seems that in BPP’s answer in part (a), they do not make this subtraction. Can you help me to explain why since it causes me quite confused.
Thanks so much for your kind support.
ThanhI explain this in detail in my free lectures because the current examiner does this in almost all his NPV questions.
We would normally add back the deprecation, because it is not a cash flow. However this statement means that we would also subtract the same amount. So instead of adding back and then subtracting the same amount, we just ignore it i.e. don’t add back and don’t subtract.
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