DCF techniques (NPV)

The tax payable is a cash flow. If the tax workings are done separately then we know the cash flow to list with the other cash flows and TAD does not appear in the cash flows because it is not a cash flow. Alternatively, if you do not show the tax workings separately, then in the cash flows we subtract the TAD so as to get the taxable profit, then we calculate the tax on this, and then we add back the TAD because it is not a cash flow. Normally, both approaches end up giving the same answer. However, as I explain in my free lectures, it is safer in Paper AFM to take the first approach in case tax losses occur as is sometimes the case if it is an investment in a foreign country.

Good evening Sir. Oh ok. Now I get it because I was very confused until now. There are 2 approaches when it comes to dealing with TAD. We can subtract and then add back or we can deal with it in a separate taxation working and use the tax payable only. Oh waoh. Thank you very much for your help sir.

Hello Sir. I watched the lectures and you said that if an NPV question states that "TAD = amount of depreciation needed to maintain current level of operation" then we subtract TAD only and we DO NOT add back. Am I right?

My 2nd question is about "depreciation" in the calculation of FCF and FCFE. In either pro forma "depreciation" is normally added. Ok. Now what if an FCF/FCFE question states that "depreciation = amount needed to maintain current level of operation" ? What should I do in such a case? Should I rather deduct it, ignore it or add (as per the pro forma) and then deduct it? Thank you. I am asking because in "Dividend Capacity calculation" we ignore depreciation if it = amount ...

The answer to both questions is the same. Although the depreciation itself is not a cash flow, if the same amount is needed to maintain the current level of operation then we do not add back the depreciation because there is a cash outflow of the same amount.

Ok. If I get it right we should completely ignore (just like in Dividend Capacity calculation) depreciation in FCF/FCFE question if it = amount needed... Am I correct Sir?

Yes, ignore it as regards not adding it back. However it is relevant for calculating the tax itself.

Good morning Sir. Thank you very much. I am really enjoying watching the lectures.

You are welcome :-)