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It is about the Lamri Co from Dec2010
I find every thing ok with the official answer written by ACCA by I have some problem which I did not understand why it has not take the account of Depreciation while calculating cash flow to the equity as I know cash flow to the dividends capacity of the company,
The question says ———– 1. An investment equivalent to the amount of depreciation to keep its non-current asset base at the present productive capacity. Lamri charges depreciation of 25% on a straight-line basis on its non-current assets of $15 million. This charge has been included when calculating the operating profit amount. 2. A 25% investment in additional non-current assets for every $1 increase in sales revenue. 3. $4•5 million additional investment in non-current assets for a new project.
Lamri also requires a 15% investment in working capital for every $1 increase in sales revenue.
I want to know that why depreciation such as 25% of non current assets is not added back and why it did not atke the account of depreciation since lamri require 25% investment in addition non current assets for every 1$ increase in revenue
That is 25% x (20/120 x 80,000) = $3333.3$000 Operating profit (30% x $80,000,000) 24,000
Less interest (8% x $35,000,000) (2,800)
Less taxation (28% x (24,000 – 2,800)) (5,936)
Less investment in working capital (15% x (20/120 x 80,000)) (2,000)
Less investment in additional non-current assets (25% x (20/120 x 80,000)) (3,333) Less investment in project (4,500) Cash flows from domestic operations 5,431
Cash flows from overseas subsidiary dividend remittances (W1) 3,159
Additional tax payable on Magnolia profits (6% x 5,400) (324)
Dividend capacity 8,266According to me it should be
$000 Operating profit (30% x $80,000,000) 24,000
Less depreciation 25% x (20/120 x 80,000) = (3333.3) Less interest (8% x $35,000,000) (2,800) Less taxation (28% x (24,000- 3333.33– 2,800)= ( 5002.6)
Add back depreciation
Old assets 25% $15m = 3.75
New assets due to increase in sales 25% x (20/120 x 80,000) = $3333.3
Less investment in working capital (15% x (20/120 x 80,000)) (2,000)
Less investment in additional non-current assets (25% x (20/120 x 80,000)) (3,333) Less investment in project (4,500) Cash flows from domestic operations 6367.85
Cash flows from overseas subsidiary dividend remittances (W1) 3,159
Additional tax payable on Magnolia profits (6% x 5,400) (324)
Dividend capacity 9202.85Please tell me where I am wrong
Point 1 in the question says that depreciation has already been subtracted in arriving at the operating profit, so you do not subtract it again in order to calculate the tax.
Also, although the depreciation itself is not a cash flow and so would normally be added back, it is equal to the investment needed in the existing non-current assets (nothing to do with the amount needed for additional non-current assets).
i have subtracted only depreciation for 25% investment for every $1 increase in sales revenue before calculating tax and adding it tax has calculated. because question has said a 25% investment for every increase in $1 revenue.
The answer has assumed that the depreciation on the additional non-current assets will only apply in later years (not in the year of the expenditure).
Sir ,
why is the investment in non current asset and working capital calculated as 15% x 20/120 x 80 ? I thought it will be 15% x 20/100 x 80. why 20/120?
I assume that you have looked at the original question (because Ashok only typed the parts of the question that were relevant to his problem)?
For every 100 profit this year, the profit next year will be 20% higher at 120.
Therefore for every 120 next year, the increase will have been 20.Since it is 80 next year, the increase will have been 20/120 x 80.
Sir,
In Pursuit Co question, for additional investment requires 18c per increase in sales revenue. in this case 18/100 x 3013 (the increase) was used…
I’m kind of confused on when to divide by 100 or by 100 plus the percentage increase. in this case 18/118
Sir,
Why do we deduct inv in working capital, non current assets and inv in new project from PAT, after tax calculation? I wanted to deduct it from operating profit and calculate tax after that. I would appreciate your clarificationBecause investment in working capital never affects the taxable profit.
Investment in non-current assets and in new project does not affect taxable profit either (but obviously give rise to capital allowance tax savings).Hi John. In this question the tax allowable depreciation isn’t added back but in Limmi co ( c) (June 2013) the tax allowable depreciation haa been added back. Why is that?
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