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Sir in the question it is given that company has made sufficient profits to get advantage of any tax loss relief
Please explain this statement as cash flows in year 1 are (3732) so the company should get tax loss relief by deducting this amount from year 2 and then applying the tax rate but in the answer no tax loss relief is given and instead there seems to be tax benefit of 1796 how come all this is happening no idea?
This is the normal assumption that we make (unless told otherwise or the investment is in another country), just as we always did in Paper FM (was F9).
We assume that the company is already making profits elsewhere and is therefore already paying tax. If the new project makes a ‘loss’ it simply means that the company as a whole is making less profit than before and will therefore pay less tax than before – the new project is therefore resulting in a saving of tax (effectively a tax inflow).
As I wrote in my previous reply, we only carry forward losses if it is a new investment in a foreign country (because then there are no existing profits to set the loss off against).
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