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hi sir,
i frequently see this statement in the examiners questions “it can be assumed that the tax allowable dep is equivalent to the amount of investment needed to manintain current operational levels. what does it mean?Depreciation itself is not a cash flow and is therefore usually ignored.
However, if the statement you quote is there, then although the depreciation itself is not a cash flow, there will be a cash outflow each year because of new investment (and the amount of the cash outflow will be the same as the depreciation). The end result is that depreciation amount does then effectively become a cash flow.
I don’t know how to give an example without making up an entire question!!
If the depreciation is (say) 100, then in getting the cash flows initially you ignore the 100 (apart from sorting out the tax effect) in the same way as always.
However at the end you then put in an extra cash outflow of 100 for the extra investment in non-current assets.In future please start a new thread when you are asking about something different (I know that the word ‘investment’ occurs, but there is no connection at all to the original post 🙂 ).
Institution investment is investment in companies by institutions such as pension funds, unit trusts (i.e. mutual funds).
Because they are investing large amounts, they are able to exert a lot of influence over companies that they invest in. In particular they will be concerned about the dividend policy of the company.
They only invest in large quoted companies and so it is these companies who will be wanting to keep the investors ‘happy’.
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