Chapter 13 Taxation

Hi- thank you for your question.
In our investment appraisal calculations we enter all of the relevant cash flows (costs or savings) that are caused by the project.

Depreciation is not a cash flow so we do not include in our NPV calculation. Instead of depreciation businesses will often receive a write-down-allowance (WDA) on their non-current assets, which are known as capital-allowances. These share the cost of the asset over its useful lifetime.

The WDA is entered as an expense in our current period profit which reduces our profits and so reduces the actual amount of tax we are required to pay on those profits. It is this tax effect that is a relevant cashflow.

In terms of your next question – Im afraid you’ve misunderstood. We dont assume that capital allowances come back at the end. Instead the final adjustment is known as a balancing allowance or balancing charge.
At the end of the asset’s life- the business will compare the scrap value received for the asset to the total of WDAs that have been claimed to that date. Where the company has not claimed the assets net value in WDA – they will be entitled to additional WDA known as balancing allowance. Alternatively if the company have effectively claimed too much WDA during the life of project then they will have to repay some of this back as a balancing charge. In both cases it is the tax effect which is a relevant cashflow.

If you’d like to watch the worked example from CIMA P2 chapter (exercise 3) – this can be viewed at following link:
https://opentuition.com/acca/f9/acca-f9-relevant-cash-flows-for-dcf-taxation/

This resource is from our ACCA library but relates to the same topic area and exercise as shown in CIMA P2 notes.

Many Thanks
Cath