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Hi all,
I am working though BPP practice kit by myself and do not understand the answer of question 23-Fubiki page 26.
The question mentioned that TAD is available on P&M however in their answer I dont see they subtract this TAD before calculating tax.
Please could anyone explain to me why this has been done?
Thank you very much.
Oanh.
The answer has used the normal method that we use for Paper FM (was F9) in that they have calculated the tax on the operating cash flow (before allowances) and then separately calculated the tax is that is saved as a result of the TAD. (If you are not sure what I mean, then do watch my free Paper FM lectures on investment appraisal with tax).
The alternative – which will give exactly the same result – is to subtract the TAD so as to get the taxable profit, then calculate the tax on the taxable profit, and then add back the TAD because it is not a cash flow.
The second alternative is the better approach for current exam questions because it is commonly an investment in another country and there can be tax losses. If there is a tax loss the there is no tax payable that year and the loss reduces the taxable profit in the following year.
Thank you very much John.
I have calculated using the second alternative and got the same results.
Best Regards,
Oanh.
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