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Hi dear John Moffat.
I’d like you to pay an attention to the following questions, please sir: Q-No4 (Dec2014) and Q-No32 (Sep2016). My issue is about tax allowed depreciation (TA Depr.) . Both question exactly ask the same think- calculating of NPV. ?n Q-No4 (Dec2014) firstly TA Depr. deducted from Cash flow before tax, and further added back to the After- tax profit. But in Q-No32 (Sep2016) no TA Depr. deduction made in the answers Paper.
Thanks a lot in advance.
I would be very grateful(PS: i am really sorry whether this topic has been already discussed.)
If you watch my free lectures on investment appraisal with tax, then you will see that there are two ways you can deal with the tax – both giving the same result.
The quickest way is to calculate the tax on the operating flows ignoring tax allowable deprecation, and then bring in the tax saving on the tax allowable depreciation. This is what the examiner does in his answer to the Sep 2016 question, and also he shows this way as an alternative in his answer to the Dec 2014 question.
The other way is to subtract tax allowable depreciation from the operating flows, then calculate the tax, and then add back the tax allowable depreciation because it is not a cash flow.
Again, both ways give the same final answer, and in the Dec 2014 question the examiner shows both ways.
(By the way, I have uploaded lectures working through the whole of the September 2016 exam.)
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