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When calculating NPV, with TAD adjustments, when do we know which year do we start to claim?
For example in the Fubuki question :
Initial cost of acquiring suitable premises will be $11 million, and plant and machinery used in the manufacture will cost $3 million. Acquiring the premises and installing the machinery is a quick process and manufacturing can commence almost immediately.
Fubuki Co’s tax rate is 25% per year on taxable profits. Tax is payable in the same year as when the profits are earned.
Tax allowable depreciation is available on the plant and machinery on a straight-line basis. It is anticipated that the value attributable to the plant and machinery after four years is $400,000 of the price at which the project is sold.
No tax allowable depreciation is available on the premises.Why are we not claiming from Year 1 ?
If you look at workings 1 in the examiners answer, you will see that TAD has been subtracted for the profits of the first year in calculating the tax payable. Having calculated the tax, this is payable at time 1 because the question says tax is payable in the same year as when the profit is made. Had the question said that tax is payable with a one years delay, then the calculation of the tax would not change, but the tax for the first year (of 10) would be payable at time 2.
It might help you to watch the free Paper FM (was Paper F9) lectures on investment appraisal with tax, because I explain all the tax rules there, and this is revision from Paper FM.
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