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Hello,
I am getting confused at something. In some maths, I am seeing they are including tax allowable on depreciation while in others they are including tax savings on capital allowances. How do I know when to use what!And yes I have seen your lectures sir. It’s just that my MBA finals, P7 and P4 all are on the same week. In such a hectic time, I am forgetting little things and bothering you with every problem I get. Hope it’s ok.
Can we put an assumed Cash flow before tax amount due to time constraints or will they cut marks??
I don’t know why you are heading this up as APV v NPV, because the treatment of tax allowable depreciation is the same in both cases.
There are two alternatives – both of which end up with the same answer.
You either calculate the tax on the operating profits (ignoring tax allowable depreciation) and then show the tax saving on the allowable depreciation as a seperate inflow,
or, alternatively, you subtract the depreciation from the operating profit, then calculate the tax, and then add back the depreciation because it is not a cash flow.
Again, both approaches give the same answer.
The current examiner often says that there is extra investment needed to maintain non-current assets of an amount equal to the depreciation. In this case the second approach to depreciation is best, but we do not then add back the depreciation (because although the depreciation itself is not a cash flow, there is an equal cash flow for maintaining the assets).
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