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Dear sir,
In question Talam, we first have to calculate the NPV of the Uwa Project.
It is said: “Talam Co makes sufficient profits from its other activities to take advantage of any tax loss relief.”
I understand that it would mean that I should not carry forward any losses to other years but why I the impact of losses carried forward excluded from calculation completely? It would still be beneficial for shareholders and directly related to project NPV.
Hope I made my point clear.
Thanks in advance.
If the company is already making profits then they are already paying tax.
If the new project makes a ‘loss’ then this will reduce the current profits of the company and will therefore result in them paying less tax. Therefore the project ‘loss’ results in a tax saving (just as project ‘profits’ result in more tax payable). So in this question the ‘loss’ of 8,982 at time 1 results in a tax saving (an inflow) of 20% x 8,982 = 1,796.
This is as we always assumed was the case in Paper FM. In Paper AFM we make the same assumption unless the project is in a foreign country (as is often the case in AFM). If that is the case then any project losses will be carried forward to reduce the taxable profits in later years, although the rules on losses in the foreign country are always stated in the question.
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