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Dear Sir,
I have 2 questions related to J18 Q2 a solution. Please help to clarify me if you have time. Much appreciated.
1- Why TAD is not added back after calculating tax?
2- W5: Why use PV of an annuity for years 2 – 5 but not 1-4?1. The tax has been calculated separately in W1 based on the operating flows less the TAD, which is correct.
In arriving at the cash flows for discounting, TAD has not been subtracted and there is nothing to add back.
(In Paper FM, we usually calculate the tax within the statement arriving at the cash flows, and so there the TAD is subtracted, the tax calculated and then the TAD added back. However, as I explain in my free lectures, for Paper AFM it is better to calculate the tax separately and then just show the tax outflow in the statement arriving at the cash flows.)2. Although the interest is payable in years 1 to 4, the tax has a one year delay and therefore the tax saving on the interest is in years 2 to 5.
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