1. 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!

  2. 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?

    • Avatar of johnmoffat 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.

  3. Avatar of iluvgorgeous says

    Dear John
    I just want to say thank you sooooooooooooo much for the brilliant lectures. I have been living with your lecturers in the last couple of months and I have done to paper today and I feel pretty positive, thanks to your brilliant style of teaching. If you ever decided to teach in London I will be your front line student. thank you.

  4. avatar says

    Could you please explain me which DF for leasing should I use for such questinons? Namely for questinon ASOP Co. I can not match DF @6% 3.673 shown in answers with annuity table.

    Sorry if the qustion sounds stupid.


    • Avatar of johnmoffat says

      For the lease buy decision you should discount the flows at the after-tax cost of borrowing.

      In ASOP the before tax cost is 8.6%, and so the after tax cost (with tax at 30%) is 8.6 x 0.7 = 6.02% – so discount at 6%

      With regard to the discount factor itself, because the payments are made in advance, the first payment is at time 0, and then there are payments at times 1, 2 & 3.

      The discount factor for a payment at time 0 is 1.
      The discount factor for an annuity at times 1 to 3 is the 3 year annuity factor at 6% = 2.673

      So….either discount the two bits separately and then add up, or multiply the figure by the total of 1 + 2.673 = 3.673

      (PS If you ask about specific questions, please say where the question is from. I can’t remember the name of every exam question that there has ever been, and it takes ages for me to find it :-) )

  5. avatar says

    Good evening, John!
    Could you, please, help on the following question: i tried to do question from December 2009 Exam # 1 regarding lease or buy the new technology, and I’ve got the following question:
    why when trying to find option 1 – bank loan license fees are included? nothing told about interest payable on loan, but license fees are calculated, and what is more, tax saving on license fee is given.
    And just would like to clarify general approach:
    1) when we use option bank loan – we have non-current asset, and as result we have tax saving on WDA, which should be included into calculation of CFs, besides we should include interest payable on the loan + tax relief. Is this all regarding taxation?
    2) when we use option leasing – we only have lease payments and tax relief on the lease payments?
    Thank you in advance!

    • Avatar of johnmoffat says

      As far as the lease or buy decision is concerned, if we lease the machine then the only payments are the lease payments (they include the license fee) and we get tax relief on the lease payment.

      If we buy the machine, then we get the tax saving on the capital allowances. In addition there are the license fees an we get tax relief on these. We do not bring in the interest payments (or the tax relief on them) because these are taken account of by the discounting.

  6. avatar says

    hi sir i have a question if the question does not state when the asset is bought but says it has a year end of 31 december and that the 1st payment is made in january when do i claim WDA year 9 or year 1

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