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One of the adjustments in the problem is as under
1) Corporation Tax at the rate of 30% payable in the year in which cash flow occurs. Tax allowances are not available on the initial investment or development costs payable by F4U.
2) Development / improvement costs of 1 million at the year end two and three
My query is while setting up NPV Calculation and arriving at profit at every year end whether we should be deducting development costs of 1 million at year 2 and 3 and then charge 30% tax on the residual amounts. or we should NOT be deducting 1 million amount from cash flows.
Kindly clarify as ACCA solved answer has NOT deducted this amount of development costs from cash flows of year 2 and 3.
Kindly help
Deep
The development costs are not eligible for tax relief, so those expenditures of $1M stay at $1M and are simply discounted. So:
NPV = Net operating cash flow – initial investment – development costs
= (2,520,000 x 4·231) – (6,000,000) – (1,000,000 x 0·812) – (1,000,000 x 0·731)
= $3,119,120
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