- September 8, 2021 at 8:12 pm #634980Syed Ahsan AliParticipant
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Sorry to ask you again this question 🙁 but in one of your posts, you said these to be true which confused me so I thought I should ask you!
This question is related to NPV investment appraisal with tax:
1) If Net Operating Cash Flows occur at the start of the year on (1.1.2017) then tax is calculated at the end of the year (31.12.2017) but the tax is paid on Time 1 (1.1.2018) AND if the tax is paid one year later then it is paid at Time 2 (31.12.2018).
2) However, if the Net Operating Cash Flows occur at the end of the year on (31.12.2017) then tax is calculated immediately at the end of the year at (31.12.2017) AND if the tax is paid one year later then it is paid at Time 1 (31.12.2018).
3) Instead of Net Operating Cash Flows if the machine was bought on the first day then rule (1) will be applied and if the machine was bought on the last day then rule (2) will be applied.
4) We just have to see when the first cash flow occurs whether it occurred on the first day or last day of an accounting period then the tax effect will be at Time 2 according to rule (1) OR at Time 1 according to rule (2).
5) It is assumed that all the cashflows in the NPV question occur on the first day of an accounting period unless told otherwise and tax flows is calculated at the end of the year.
6) It is the same rule that you mentioned at the end of your Lease & Buy lecture and you said in one of your posts in another thread that it is the same rule for standard NPV questions and for lease & buy questions.
Is that all correct?September 9, 2021 at 7:21 am #635037John MoffatKeymaster
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1, The tax is calculated on 31,12.2017 (time 1) and is paid one year later on 31.12.2018 (time 1)
2 If time 0 is 31.12.2017 then correct.
5. No. As I explain in my free lectures on investment appraisal with tax, we always assume that the operating flows are on the last day of account periods, and that the initial investment is on the first day of an accounting period (unless, obviously, the question says differently).
6. The tax rules are the same whatever the type of question. It is just in lease buy questions where you need to be more careful about the timings of the cash flows.
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