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Greetings Tutor. I hope you are doing well.
Can you please help me with one of the points in the exam kit question Pinks Co (March/June 2019).Req (ii) of the Question asks to calculate the Real Net Present Value of Pinks Co’s investment project and also to comment on the findings.
In the suggested answer, the nominal cash flow before tax has been deflated using general inflation rate and then tax payment in real terms has also been computed.
But the TAD tax benefit has not been deflated using general rate, rather the TAD tax benefit figures are the same in both the cases i.e. NPV in nominal terms and NPV in real terms. Can you tell me why it is so?
The TAD tax benefit is not affected by inflation because it is based on the actual tax savings from capital allowances, which do not change with inflation.
Therefore, when calculating the Real Net Present Value (NPV), the TAD tax benefit remains the same in both nominal and real terms. This is because the tax benefit is a fixed amount that does not need to be adjusted for inflation, unlike other cash flows that are subject to inflationary changes. Thus, it is appropriate to use the same TAD figures in both calculations.
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