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Hi, need ur help…..
In the question 28 Fubuki (12/10) in BPP revision kit, in their answer for part b, they say that the assumption made in the calculation of part (a) include “the annual reinvestment needed on plant and machinery is equal to the tax allowable depreciation”. And he further states that this is a standard assumption made for a question of this nature.
Does it mean that the allowance amount can be treated as cash outflow.If so, how can that be a standard assumption.
Moreover in the answer provided it is not treated as a cash outflow.
Thanks
You have obviously not watched my free lectures, because I explain that this is something the current examiner always does, and I explain what it means and how we deal with it.
The TAD is certainly not a cash flow, which is why we would normally add it back after calculating the tax.
However the same amount is being spent on this annual reinvestment, and that certainly is a cash outflow.So, either add back the TAD and then subtract the cash outflow for reinvestment, or get the same end result by not adding back the TAD and not subtracting the reinvestment.
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