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hello sir i was doing dec 2013 paper and the first question on international investment appraisal along with my tutor , and in that question after the net cash flows were calculated in foreign currency of PESOS , he added back depreciation explaining it was to add back non cash items, now i have never seen in appraisal questions e are adding back depreciation ,why was it added back? and is it done specifically in these international appraisal questions?
Whether or not it is international appraisal, there are two ways of dealing with tax-allowable depreciation (which end up with the same answer).
One way is to subtract depreciation to get the taxable profit, then calculate the tax payable, and then add back the depreciation because it is not a cash flow.
The other way is to calculate the tax payable on the profit ignoring the depreciation, and then bring in as a inflow the tax saved on the tax-allowable depreciation (the tax saving on the capital allowances).
Either way is valid (and ends up giving the same answers). Which is the easier depends really on the question – usually if it is not international then the second way is the quicker. If it is international then usually the first way is the quicker.
If the two ways are not clear, then it will help you to watch the Paper F9 lectures on investment appraisal with tax where I do explain (because the dealing with tax allowable depreciation itself is revision of F9).
My tutor was using 2nd method but again in the end he subtracted depreciation ?
But that is the exact opposite of what you wrote before!!
You wrote before that he added back depreciation, which suggests to me that he was using the first of the two methods that I wrote in my reply. Also, as I wrote, doing it that way is usually the quicker way when it is international appraisal.
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