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1. Looking at the solution for this case study on (a), i see that 30% tax is applied on yr2 & yr3 losses of $21.23m and $7.92m respectively thus reducing the company’s losses by the tax amount in these two years. Is it possible to have a loss relief?
2. Assuming that Working capital is required at the beginning of each year and the years of operation are 4 ( Cash flows appearing from Yr2 to Yr5) then we record WC in Yr0 for Yr1 Cash flows, in Yr1 for Yr2 etc. why is there a WC in Yr5??
1. No. The company is already successful and is therefore presumably currently profitable and therefore currently paying tax.
A ‘loss’ on the new investment will simply reduce the existing profit of the company and therefore reduce the existing tax payable – hence there is a tax saving resulting from the new investment.2. I don’t have the Kaplan Kit (I am looking at the examiners original answer) and so I don’t know what Kaplan have done with regard to the working capital.
In the examiners answer there is an outflow at time 5 and then all the working capital is recovered at time 6.
What should happen is that there is an outflow in each of time 1 to time 4, and then at time 5 (which is when the project finishes) all of the WC should be recovered (so an inflow at time 5 of 56.28).
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