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Good morning sir!
Even tho i have done this question before…but it continues to throw me off.
1. at T0 and T1 it shows the capex of -127.5 and -36.88. where and how is he getting these figures? What we usually encounter is if the capex is, say, 50m, then t0=-50.
so my basic mistakein doing this problem was to change the figures:
-127 changed to 150-75=75
-36.88 changed to 50-25=25where the deductions of 75 and 25 are the FYA 50%.
so even tho my subsequent corrections were correct, the NPV was totally wrong.
can u explain -127.5 and -36.88?
thank you and regards
The initial capital investment was 150. The capital allowance is 50% which is 75, and therefore the tax saving is 30% x 75 = 22.5.
Therefore his net cash flow is 150 – 22.5 = 127.5.The second capital investment is 50. The capital allowance on this is 50% which is 25. In addition there is writing down allowance of 25% x 75 which is 18.75 (from the first investment at time 0).
So the total allowance is 25 + 18.75 = 43.75, and so the tax saving is 30% x 43.75 = 13.12
So the net flow is 50 – 13.12 = 36.88
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