Burung Co

Yes they should be inflated because we need to discount the nominal (actual) cash flows at the nominal (actual) cost of equity. They are inflated by multiplying the current price flows by (1+i)^n, where i is the relevant inflation rate and were n is the number of years. I do suggest that you watch the free lecture on investment appraisal with inflation (and if necessary the relevant F9 lectures, because it is revision of Paper F9).

Sir in one of the note of this ques is the taxation impact on the scrap value referring to the cap gains tax? And is this the same as after-tax realisable value? "Of this, $16 million relates to plant and machinery, which is expected to be sold for $4 million when the project ceases, after taking any taxation and inflation impact into account."

It is referring to all taxes and so yes - it is the after tax realisable value :-)

Then does tax on profit/loss on sale of asset i.e balancing charge or allowance included as the tax impact? Coz i saw some ques do not include balancing allowance in cash flow calculation but in some ques it is included.(when it is stated that the scrap value is after-tax)

When an asset is sold there is a balance charge or balancing allowance of the difference between the proceeds and the tax written down value, and therefore a tax effect to bring in. Some questions say that the proceeds are after tax effects, in which case we assume the balancing charge or allowance has been taken into account and so we do not bring it in again. If you have seen any questions that do differently from either of the above then you will have to say which question and I will try and explain why it has been done differently. (Incidentally, in relation to your previous question (which I answered correctly) you have never had to deal with capital gains tax in P4 - only with corporation tax.)

In this ques they said the $4mil sale value was after taking any taxation impact into account. Then why do they include balancing charge?

Had there only been note (ii) then I would have ignored the balance charge. However, note (iii) of the question specifically says that there is a balancing adjustment when the assets are sold. It does seem as though one contradicts the other, but because of note (iii) we have to do that (and it must mean that note (ii) in this question is referring only to other taxes (such as capital gains tax which we always ignore anyway).

I see, thank you so much sir :)

You are welcome :-)

Question solved.

Great :-)

Hy Sir, How do you know whether to inflate the cashflows such a sales and direct costs from the first year or second?

It depends on the wording of the question. Here the question says that that the revenue and costs have not been inflated (and so they are at current prices). Therefore (as always for flows at current prices) if the flow is in one years time there is one years inflation, if the flow is in two years time then there is two years inflation, and so on.

Got it. Thank you :)

You are welcome :-)

Why aren't we adding TAD back to profit after tax to derive at cashflows just like in other questions?

Because if you look at the workings for the tax, depreciation was subtracted in calculating the tax payments. Depreciation has not been subtracted in the actual cash flows and so does not need adding back.

Dear Sir, related to this question, i have two issues: 1) TAD, I it is not very clear for me why in the fourth year the TAD is 0.5 Mil. At the end of year 3, the tax balance of these assets should have been 4.5 Mil. During year 4, we should charge another 25% of this balance (i.e 1.125 Mil) and at the end of 4th year the balance should have been 3.375 Mil. Going further, we would compare this balance with the proceeds from the sale of 4 Mil. from the answer, I can see that they stopped with TAD at the end of year 3 and compared the 4.5 mil balance to the proceeds of 4mil and resulted another 0.5 Mil as TAD in year 4. 2) Working capital. It is mentioned the following in the question: "at the beginning of each year, the Co will need to provide wk cap of 20% of the anticipated sales revenue for the year" The beginning of Year 1 for eg it means Y0, right? I would have expected to start from the Y1 with the investment in wk cap, but they considered Y0 as starting point with wk cap charges Many thanks, Simona

1. It is standard that in the year of sale there is no writing down allowance but instead there is a balancing allowance or a balancing charge of the difference between the tax written down value and the sales proceeds. (Look back at my F9 lectures on investment appraisal with tax). However if you had calculated writing down allowance and then the balancing charge/allowance comparing with that written down value, the total of the two would be exactly the same - it would make no difference! 2. Always, the first year starts 'now' i.e. time 0. It finishes in 1 years time i.e. time 1. The second year starts in 1 years time i.e. time 1m and finishes in 2 years time i.e. time 2, and so on. For discounting we are looking at points in time that are 1 year apart - time 0, time 1, time 2 etc..

Thank you Sir! Regarding 1, you are right, i should get the same answer. Regarding 2, if I look at Neptune question, they start to compute TAD from Year X8 (which is time 0 i.e first year) but they charge it one year in arrears as the question says. if the question would not mention this, we would present on time 0 collumn (i.e X8), not on X9 year figures. Returning to Burung, they say that TAD is 50% available in the first year (which I should be thinking of time 0) but they include in Year 1 figures although the question does not say it is charged/claimed one year in arrears. I don't get something right...

The tax on the first years profits is calculated at the end of the first year, which is time 1. If there is no delay in tax then the tax flow is at time 1 also. If there is a one year delay in tax then that tax flow is one year later which is then at time 2.