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If the exam question states “Depreciation is the same amount as needed to maintain operations” or “It is assumed that the annual reinvestment needed on plant and machinery is equivalent to the tax allowable depreciation”.
Whether depreciation allowance is taken as cash inflows by adding back to operating cash flows or not.
In past exam answers it was not considered in cash flows to calculate NPV.
I am unable to get the information from any text books. But in all the tax allowance is added to operating cash flows after tax.
So I just want to know what this assumption implies.
Thanks in advance.
somayajuluDepreciation is not added back to the operating cash flows (because it is not a cash flow).
However, if tax has been calculated on the operating cash flows, then you do need to add back the tax saving on the capital allowances.
Sir,
What u said is exactly right and I know it, but my question remains, If the exam question states “Depreciation is the same amount as needed to maintain operations” or “It is assumed that the annual reinvestment needed on plant and machinery is equivalent to the tax allowable depreciation”.
then your second answer “However, if tax has been calculated on the operating cash flows, then you do need to add back the tax saving on the capital allowances.”. Holds good or not. I had seen in some past questions the capital allowance was not added back as answered by you. That’s why I am in doubt.
regards.
Sorry if I had not posted question properly
somayajulu
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