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Hello Sir.
The following is a question from the past exam paper (December 2014).
Would you kindly explain why the statement A is incorrect?
Don’t we include tax savings from tax depreciation allowances to arrive at NPV in Lease or Buy decisions?
Totally confused here…What did I get wrong?
Please help me out.Q6. Which of the following statements is correct?
A Tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to leasing as a financing choice
B Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of debt
C If capital is rationed, divisible investment projects can be ranked by the profitability index when determining the optimum investment schedule
D Government restrictions on bank lending are associated with soft capital rationing
The tax allowable depreciation is not itself a cash flow.
It is relevant for calculating the cash flows when buying (because it results in a saving of tax) but the depreciation itself is not a cash flow.
Crystal clear.
Totally overlooked that tax allowable depn and a tax saving from it are two different things!
You are a star. Thank you again.
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