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Hi, I need some help from tutor of p4 from OpenTuition regarding tax allowable depreciation equilavent to additional investment in assets.
In June 2011, Corporate Tax was tax on the operating profit and followed on to deduct additional investment.
( i.e 5,477 – ( 1,534 tax 28% on 5,477 ) – ( 213 additional investment to arrive at FCF 3,730In June 2014, it was additional investment deducted from the Profit and followed by Corporate Tax was tax on the profit.
Your explanation would definitely be very much appreciated .
June 2013 Q3 does not have any tax in it!!
There are two ways of dealing with tax (both of which give the same answer, and get full marks).
You either subtract the tax allowable depreciation, then calculate the tax and then add back the tax allowable depreciation (because it is not a cash flow).
Alternatively you calculate the tax on the operating profits (before depreciation) and then calculate separately the tax saving on the depreciation.The current examiner usually used the first approach. Also, he does not add back the depreciation, because although it is not a cash flow, he assumes the same amount will need spending on new assets. So instead of adding back and then bringing in the same amount as a cash outflow (which strictly is what is happening) the net effect on the cash flows is zero, so easier just to do nothing 🙂
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