Capital investment decision questions

DDumi4y ago

Hello Sir, I am doing a Cash Flow table to calculate the NPV of investment for 5 years. There is the Redundancy Pay of 18 million paid at year 5 prices. Should I deduct it from the contribution? or what is the right way to include Redundancy Pay in NPV calculations? If I do, I get a negative taxable cash flow(loss) and the tax at 30% would be 0 for that year, right? Also, can I add the tax-allowable depreciation back for that year (when loss incurred) even the tax paid was 0 ? Thank you and sorry if the questions may be confusing.

John MoffatAdmin4y ago#1

For the redundancy pay you show a cash outflow at time 5 of the 18 million as inflated for 5 years. As far as a negative cash flow is concerned, it results in a tax saving. The reason is that (certainly for Paper FM) we always assume that the company is already making profits and is therefore already paying tax. If a new project makes a 'loss' in any year, then this is simply reducing the profit that the company is currently making. Therefore it means they pay less tax in total, so the project 'loss' results in a tax saving. I do explain both points in my free lectures on investment appraisal.

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