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Why did we start the Working capital at T0?
It does make sense, but it doesn’t say so in the question. Infact it says ‘…anticipated sales for the year’, which gives more of an idea as though it starts from the first year on wards.Doubt : 2
For the purpose of issue cost, why do we consider the cost of the project as 14,488? 14m is CAPEX but total working capital is 1096, so it idly should be 15,096.First question:
The first year starts at time 0 (‘now’) and finishes in 1 years time i.e. time 1.
The second year starts in 1 years time (time 1) and finishes in 2 years time (time 2).If this doesn’t make it clear then I do suggest that you watch the Paper F9 lectures on relevant cash flows for investment appraisal.
Second question:
The whole purpose of discounting is to account for the timing of the cash flows. The total working capital does end up being 1096, but it is not all needed at time 0 – only 488 is needed at time 0.
Sir, why is the tax allowable depreciation not added back to post-tax operating cash flow?
We only add back the TAD if it had been first subtracted in the cash flow statement.
Here it has not been subtracted in the cash flow statement (only in the workings for the tax) and therefore there is nothing to add back.
I do suggest that you watch my free lectures on this.
Can i have the link please? I can’t find it..
I don’t understand.. does that mean if i subtract it ‘on the face’ of the cash flow rather than working, i’ll have to add it back later?
I only learned two approaches which are : 1. subtract it and add it back method, 2. deduct tax% x TAD from post-tax operating cf. I tried the question using method 1, which leads me to a different answer from examiner..You can find the whole list of lectures linked from the main AFM page – they are a complete course and should be watched in order. You also need to download the free lecture notes which are linked from the same page.
Tax is calculated on the profit after subtracting the TAD. If you subtract the TAD in the cash flow statement and then calculate the tax, then you do need to add back the TAD because it is not a cash flow.
In Fubuki, the TAD has not been subtracted in the cash flow statement and therefore is not added back. The tax has been calculated as separate workings (working 1) – on the cash flows less the TAD.
Both methods will give the same answer for this question – I cannot explain what you have done wrong without seeing your answer.
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