1. avatar says

    Hi..I have a doubt.. In one of the examples pertaining to the comparison of lease vs buy,it was written that”purchase of machinery would be financed through a four year loan paying interest at an annual rate of 8.6%” why didn’t we take this and its tax implication into consideration??

  2. Profile photo of jay0v says

    Hello Sir,
    I have a confusion with the statement in the question
    “Buying it will involve borrowing money at an after tax interest cost of 7% p.a”
    It only says buying it so why do we use the interest rate of 7% for leasing, or is it that we assume that the money is always borrowed?

  3. avatar says

    Hello Jon,

    Example 3 purchase VS lease,when you calculate the CA tax savings for the machine, you applied 5 years savings but the machine only last for 4 years, why? Because it was bought at last day of accounting year?

    • Profile photo of John Moffat says

      Yes. Because it was bought on the last day of the year, you would get CA’s for that year. Then you use it for 4 years and you get CA’s for those 4 years as well.

      (It is something that really only happens in the exam in a lease/buy question. Normally in other questions we assume the machine is bought on the first day of a year and so it if lasts 4 years there are 4 CA calculations)

  4. avatar says

    I got few confusions John:

    The corporation tax was as a tax payable, but in lease you didn’t assume it as subtraction like rather than ($10500), you simply indicated as +$10500.

    In ch#8 ex3 and onwards, we continued to assume that taxation 1 year in arreas and put on the profit’s figure year later, like $1000 profit in year2 and 25% tax = $250 in year 3. BUT why we moved to another forward year, althought you told us that its rule…ahh but why this?

    The purchase was made at year0 and hence 0,1,2,3years become 4years, with the fact that we purchased on year 0, regardless of its date( dec 31), but why it happened as year forward?

    I know its all about dates problems but I think I need your bit help, although major part of help is being conducted through your lectures :)

    Many Thanks

    • Profile photo of John Moffat says

      1 The tax is not payable. We are making lease payments, these will be allowable for tax, so it will reduce our existing tax liability – we will save tax.

      2 We usually assume that operating flows are at the ends of year. So it will affect the profit immediately, and the tax effect will be one year later.
      The lease payments are made at the start of the year, so it will affect the profit calculated at the end of the year (i.e. one year later), and the tax effect will be one year after that.

      (The cash flows are points in time – they are not whole years. Time 0 is now, time 1 is one year from now, time 2 is 2 years from now, etc..)

      3 We usually assume that machine are bought at the start of a year. In which case, then capital allowances are calculated at the end of the year (i.e. time 1) and the tax effect is one year later (time 2).
      This question says that the machine is bought on the last day of the current year. So (from Paper F6) the first capital allowances will be calculated immediately (cos we are at the end of the year) and the tax effect will be one year later – i.e. time 1.

      It is only with lease and buy that you have these tax timing problems (because otherwise it would be too easy :-) )
      To be honest I will be surprised if it is asked this time because it was asked last time.

      • avatar says

        Thanks for the help. Its clear now. “To be honest I will be surprised if it is asked this time because it was…”: my habit is I never see guess before exams as it ruins my psychology and I feel that I am bad at other topics. Its also recommended by you and examiner. Why we guess for some topics if you teach us everything here :)

        Many Thanks

      • avatar says

        ah one more thing as you explained, so we assume generally preculded from leasing that the cash outflows at year start( costs ) and it cash inflows at year end ( profits), hence we put scrap value that likely. But now here we are assumed at 31st Dec, so this way it also extends the scrap figure to year forward.

        Many Thanks

  5. avatar says

    Hi John, firstly, thanks for your great lectures! You make it very easy to understand the concepts. I need one clarification on the tax rule you mentioned at the end of this lecture: “Payment at the end of accounting year – tax effect is 1 yr later.” Is the “end of accounting year” referred to here is the “current” accounting year? Is it the day before time 0? Also, when the term “current” is mentioned in the exam, is it usually the period before time 0, like for example, the inflation of costs referred to in example 4, chapter 8?

    Thanks much!

  6. avatar says

    Hello John, I’m a bit confused with this example, you assume the year end is December, so 1.1.2011 is beginning of the year, 31.12.2011 is the year end, corporation tax is payable one year after the year end, so should be 31.12.2012. If 2011 is year 0, then 2012 should be year 1, the tax savings should be the end of year -31.12.2012, why do you say it is in year 2 2013 which is 2 years after the year end of initial payment?

    • Profile photo of John Moffat says

      Time 0, time 1 etc are not years, but points in time.

      The first payment is on 1.1.2011, time 0. The tax is calculated at the end of the year and payable one year later I.e 31.12.2012.

      From 1.1.2011 to 31.12.2012 is two years (we are not bothered about one day) and therefore is time 2 because it needs discounting for two years interest.

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