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Hi John
In examiners answer he reduces sales by 30% tax
( Sales are not taxable only Profits )
Why ?Are there any other variables which need to be adjusted by tax rate ?
thanks
The easiest way for me to answer is with a tiny example:
Suppose sales are 100 and costs are 60. So profit is 40 and therefore tax is 12, leaving a net cash flows of 28.
Now suppose sales drop by 10%.
Sales are 90 costs are still 60. So profit is 30 and therefore tax is 9, leaving a net cash flow of 21.
The fall in the profit (7) is the fall in the sales (10) less the tax on the sales (3).
So, when looking at the sensitivity of any flow, you need to work out the present value of that flow and any tax affect on that flow.
I hope that does make some sense for you 🙂
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