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Hi John,
I am quite confused with the tax allowable depreciation and taxable profit treatment done for this problem, could you please clarify the logic behind deducting it first and then adding back? Since it’s different from our normal NPV calculation .Thanks
Hi John,
To be more specific I understood their calculation for taxable profit but as per the given answer the net effect of taxable depreciation is zero because it’s deducted added back . Why is it so? As per normal method we should have added the same rit? Please clarify this point. Thank you so muchTAD is subtracted in order to calculate the taxable profit and hence the tax payable.
However, since the TAD is not a cash flow, it has then been added back to arrive at the net cash flow. The net effect is not zero because the tax flow is affected.
This is what we always do in Paper FM (was Paper F9). However more often in recent AFM exams, the question has said that an amount equal to the TAD is needed for the maintaining of assets. When that statement appears we do not add back the TAD.
I do explain this point in my free lectures on investment appraisal.
Hi John,
Thanks for your reply.
I need a bit more clarification on this.Normally we follow this procedure of subtracting and adding back on FCFE but for NPV calculation we only add TAD.Here in this case we are doing NPV then why should we deduct Depreciation and add back.Thanks in advance for your valuable time.
But I have explained why in my previous reply!
Tax is always calculated on the taxable profit which is after deduction of the TAD. However that is just for calculating the tax. TAD is not a cash flow and therefore if it has been subtracted in the cash flows in order to calculate the tax, it must be added back to get the actual cash flow.
Have you watched my free lectures on investment appraisal (and if needed the Paper FM (was F9) lectures on investment appraisal with tax, because this is revision from Paper FM).
Hi John,
Thanks for your reply.i understood that its because of tax loss carry forward .
Thank you so much for your patience and efforts to help us.
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