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In some questions when calculating the NPV, the suggested answer shows that the tax allowable depn(capital allowance) is subtracted before the tax charge is calculated..and then once tax is subtracted, the capital allowance is added back..where as in other questions, the answer shows that the tax charge is calculated without the tax allowable depn being subtracted and then after tax is calculated the capital allowance is added…
I really dont understand when the capital allowance should be subtracted and why this is being done..plz helpYou can do it either way (and get the same answer), but best is to calculate the tax on the operating flows (ignoring capital allowances) and then separately calculate the tax saving due to the capital allowances.
This is the easiest way (and the best for getting the marks).
If you watch my lecture I explain both ways but do it in full the way I have described above.
Also, a question says that tax allowable depn on infrastructure($2700) is 20% for the first year, and straight line there after. The infrastructure has an expected working life of 6 years after which new investment will be required.
The solution shows that the tax allowable depn calculated was initially $540 and $432 for the years after.
Aren’t these figures meant to be hit by the tax charge and then put in to the npv calculation, instead of what has been done?
There is no rocket science in it, simply put the figures of 540 & 432 in there relevent years calculate the tax shield on them & deduct from the appropriate year’s cash flows (in arears or just in time).
It is irrelevent to wether first cal. tax charge and place in NPV calculation or to put figures in the main formate first and then calculate tax charge.
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