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I am having confusion with the treatment of capital allowances when calculating free cashflows.in other cases they are subtracted as part of operating profit then tax is computed and they are added back.at times they are computed as tax savings and are only factored in after tax has been calculated and in another worked example (BPP study kit)they were subtracte from profit before tax and never added back.pliz help me i am now confused as to how they are treated
It is impossible for me to answer you with certainty without knowing which question you are referring to.
However the most likely reason is that it is a question set by the current examiner. He almost always assume that there is an amount needed to maintaining the efficiency of the machines equal to the amount of the deprecation – so there is a cash outflow of the same amount as the deprecation which means there is no point in adding it back. He usually states this in the question itself, but if not then he states this assumption in his answer.
So on the treatment of them being deducted before tax and added back after tax computation and the other one of factoring them only after tax as tax savings, are the both methods correct despite them giving different answers or maybe i simply have to stick to their treatment of being added back. Reference question is Jato question from lsbf study kit topic 2.
I think you may have misunderstood my previous reply.
In most questions asked by the current examiner you have been told that an amount equal to the depreciation is needed to maintain the assets. If that is the case then we do not add back the depreciation (because there is a cash outflow equal to the depreciation).
If that is not the case, then both methods you describe above will always give the same result (unless, of course, it is an investment abroad and there are losses to carry forward – in that case the tax has to be calculated separately).
I do not have the LSBF Study Text, and so I cannot help you with the question you refer to
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