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I have a couple of question that I recently faced in the exam, but needed some clarity over it.
1. On an NPV question, when you have Sales minus variable costs minus fixed costs and you get the net cash flows, if for year 1 we have a negative net cash flow, will it still be subject to taxation, e.g. 20% a year in arrears (from Year 2) in the same way as the positive figures? Or do we simple ignore taxation for the negative cash flows on the basis that tax is only on profit? I left it blank on the latter basis but proceeded to input the tax figure in year 3 (for Year 2 that was a positive cash flow).
2. The Tax Allowable calculations on a reducing balance, will they follow also in arrears if not stated otherwise (from Year 2)? The confusion here was that I left Year 2 Tax Liability blank as mentioned above, so for the tax allowance is this separate and I can safely input from year 2 timing wise?
3. Lastly it was Discounting on the nominal rate (money rate), but is there such a thing as discounting on the real rate if given? I was confused on this because I read somewhere if given the real rate then we use the real figures and do not discount?
I am grateful for clarification
I am not going to comment on the exam until I have seen it (which will not be for several weeks yet).
However I explain everything that you have mentioned in my free lectures on investment appraisal with tax, and investment appraisal with inflation.