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Question about your lectures video (discounted cash flows techniques – part 3),
1. Do we need to calculate NPV for the home country only (and not foreign country) when appraising a foreign investment project to make accept or reject decision?
2. Why did the royalties subject to 25% tax rate instead of 5%? How to know which tax to use?
3. Why the TAD was not deducted before calculating tax, and then added back again after calculating tax?
I dont understand why the amount equal to the TAD for the maintenance of non current assets are deducted only. Because if this is the case, then it means we did not claim the TAD benefits?
I thought we should deduct both the TAD and also the amount equal to the TAD for the maintenance of non current assets? Why cant we do that?
1 Yes – it is the company in the home country making the decision and therefore we calculate the NPV in the home country.
2. the tax rate in the home country is 25% and therefore all income (including royalties) is taxed at 25%. Because of the double taxation treaty, the profits earned in Oblivia will already have suffered tax in Oblivia at 20% and therefore only the extra 5% is paying on this profits in the home country.
3. TAD is not a cash flow. It is subtracted from the profits for the purpose of calculating the tax. You should remember that in Paper FM we then added back the TAD because they were not a cash flow. However here we do not add back because there is a cash outflow of the same amount for the maintenance of the assets.
3. If we do not add back the TAD again after deducting it due to the cash outflow of the same amount for the maintenance of the assets, does that mean that the TAD is similar to the maintenance of the assets?
Because if we do not add back the TAD, we are assuming they are treated as ‘one’ instead of separate items?
If the amount of the money needed for the maintenance of the assets is the same as the TAD then there is no need to add back the TAD and then subtract exactly the same amount.
Have you watched my lectures where I explain this?
Yes, I have watched your lectures where you explained this 🙂
Will the amount be the same if we deduct both the maintenance and TAD separately before calculating tax but only adding back the TAD after calculating tax (because it is a no cash flow item)?
I guess I am confused about the mathematical logic part
I went to rewatch the lecture and I realized I mistook and treated maintenance of the assets in arriving at taxables profits which what I done is wrong.
No wonder my question didnt make any sense. Please ignore my question above
Now I understand. Even if we want to add back the TAD and then deduct the similar amount for the maintenance of the asset after the taxable profits, we will still get full mark for that?
Did I understand that correctly?
I remember in paper FM, the maintenance costs are always deducted in arriving at the taxable profits (deductible for tax purpose). I think it was in the lease or buy topics
But in this case, the maintenance costs are deducted after tax (not deductible for tax purpose). What is the reason for that?
Normally maintenance costs would be deducted in arriving at the net cash flow and the taxable profits.
However in Paper AFM, the examiner assumes an amount equal to the TAD is needed for the maintenance of non-current assets, he effectively subtracts it from the cash flows (because of not adding back the TAD) but he does not deduct it in arriving at the taxable profit. Strictly he is not correct, but that it how he always deals with it in his answers.
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