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Hi John,
Really love the discussions and solutions that you have provided to students. it is really beneficial. I do have some queries pertaining to the calculation of Capital allowances (hope it is not too silly to be asking here)When calculating CA, i understand that there r 2 methods
1.) is to incorporate in the operating expense before calculating tax and then adding back the depreciation as it is not a real cash outflow.
2.) to Ignore it totally and calculate the tax savings in the cash flowFor the first method- in the event of a Loss position. do we have to add the depreciation amount back to get the cash flow? If there are profits it is clear cut that the addition of depreciation is a neccessary. Just confused if there is a loss position.
Thanks for your clarification
If the investment is in the same country then losses are irrelevant because we always assume that the company is already making profits (and therefore paying tax). As a result, a ‘loss’ from a new project does not result in loss relief – it simply means that the existing profit of the company is reduced and that therefore there is a tax saving. Either of the two methods end up giving the same result.
If the investment is in another country (which is very often the case for AFM), then the situation is different. The profits of the new investment are taxed separately in the foreign country and therefore if there is a loss in one year there will be no tax payable and the loss is carried forward to reduce taxable profits in the following year. In this situation you need to calculate the taxable profit and the tax separately.
I do explain this in my free lectures on investment appraisal.
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