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While calculating NPV of a project, in some past paper questions, they strip out allowances from gross cashflows (annual cashflow-(all relevant variable + incremental fixed costs)) and in some, they don’t. What is the reason behind this? Secondly, wouldn’t stripping the out from gross cashflows and later adding them before arriving at net cashflows cancel out each other resulting in no effect to the NCF? Please, help me understand!
The allowances are subtracted in order to arrive at the taxable profit, because it is on the taxable profit that the tax payable is calculated.
The allowances are then added back because they are not a cash flow.More efficient for Paper FM is to calculate the tax payable on the operating cash flows, and then add the tax saving as a result of the capital allowances.
All of this is explained in detail in my free lectures on investment appraisal with tax. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you Sir. I’m already going through your lectures, just want to clear this confusion as the audio in the lectures isn’t as clear sometimes, don’t know why.
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