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Good evening Sir,
I’m going through the first question of Sep/Dec 2021 exam Zhichi.
In the investment appraisal I don’t understand why, in the solution, once calculated the TAD in order to calculate the taxable Cash flow and then the taxation of 20%, then they don’t add back the capital allowance?
Shouldn’t we deduct the tad and then add back the values after having calculated the taxes?
Thank you in advance
In Paper FM we do always add back the TAD because it is not a cash flow.
However the Paper AFM examiner assumes (and usually actually states in the question) that an amount equal to the TAD is needed for the maintenance of the non-current assets. On this assumption, there would be a cash outflow equal to the TAD being added back – the net result being that there is no need to add back. I do stress this point in my free lectures on investment appraisal for AFM.