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Hello sir,
Have a question on tax allowable depreciation for the project appraisal.Could you kindly explain why the answers provided did not add T.A.D back to the cashflow after tax calculation?
I have tried other questions and there mix of cases where they have added back or did not and I am so confused.Much appreciated
Tax is always calculated on the operating cash flow less the TAD.
You can either calculate the tax in the actual statement of the cash flows, in which case we subtract the TAD, then calculate the tax, and then add back the TAD because it is not a cash flow (and this is the approach we always take in Paper FM (was F9)).
Alternatively you can calculate the tax as separate workings (as is the case in Talam). In that case, since the TAD has not been subtracted in the statement of the cash flows, there is nothing to add back.
I assume. that you attempted the question before checking with the answer and you will therefore have found that the net cash flows each year are exactly the same for both approaches.
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