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This question is from kaplan text buk pg 604, Breckhall.
How I approached the question
Sales minus materials-labour-overhead then net receipts* tax = after tax receipts +tax allowable depreciation……….., however when comparing with the marking scheme, they have minus TAD before calculating tax and then added back after tax.
And we add only the tax relief ryt? I added 394, but in the kaplan marking scheme they have added 1125 and dedected 1125 is that a mistake by chance?for eg
4500
(1125) * 0.35 = 394
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3375I do not have the Kaplan text book, but there is no mistake.
However from what you have written they have subtracted 1125 in order to calculate the taxable profit, then they have calculated the tax, then they have added back the 1125 because it is not a cash flow.
The alternative is to calculate the tax on the operating cash flow (ignoring capital allowances) and then show separately the tax saving on the capital allowances.
Unless there are losses involved, both approaches will end up with the same net cash flow.
Their way: 3375 – (3375 x 35%) + 1125 = 3319
Alternative way: 4500 – (4500 x 35%) + 394 = 3319
My free lectures on investment appraisal will help (and if necessary my F9 lectures on investment appraisal with tax, because this is revision of Paper F9).
Yes thank you,
My answer the same as MS, got scared halfway through by looking at the answer why approach is different.
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