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Sir,
the operating cash flows in 3rd and fourth year are inflated as3rd year (14.5*1.05=15.225)
4th year (15.225*1.04=15.834)My question is why wasnt the cashflows inflated as:
3rd year (14.5*1.05^3=16.79)
4th year (16.79*1.04^4=19.64)I know this is silly but I am really confused. Is it something to do with specific and general inflation. Please clarify.
The question says that the operating flow will be 14.5M in year 2 – there is no mention that it will inflate in year 2 – but that it will inflate in years 3 and 4 by the expected levels of inflation.
Therefore it will be 14.5M in year 2.
In year 3 it will inflate for 1 year and be 14.5M x 1.05 = 15.225M
In year 4 it will inflate for another year and be 15.225 x 1.04 = 15.834MHi sir, why do they not add back the capital allowances after deducting it to calculate the tax?
Capital allowances are always deducted when arriving at the taxable profit in order to calculate the tax
They are only ‘added back’ in the cash flow summary if they had been subtracted in the cash flow summary (because they are not cash flows). In Paper FM (was F9) we tend to subtract them in the cash flow summary and then calculate the tax, in which case they then need adding back.
In this answer, they have not been subtracted in the cash flow summary because the tax was calculated separately, and therefore they do not need adding back.
I explain in my free lectures on investment appraisal why this is generally the better approach for Paper AFM.
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