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Hi John!
1.Could you explain what is meant by notional cost?
2. Could you give me a small example?
3. Is it a relevant cost?Thanks.
It is the deduction for risk capital . It is called Notional interest deduction which is a unique tax measure allowing tax- free return on qualified equity by allowing the supposed internet deduction.
It is calculated by multiplying the qualified equity by an applicable notional deduction rate.E.g if you are given a controllable profit from a capital investment after depreciation, with an applicable cost of capital ( notional rate maybe 10%). You can use it to get your Residue income : RI = controllable profit – notional intrest rate on the investment.
It can be a relevant cost because if you are offer credit or bank draft , the cost of money can be the relevant cost .
I hope this helps .Iyamu: Please do not answer in this forum – it is ask the tutor and as you say, you are not the tutor.
(And as far as Paper F5 is concerned, notional interest has nothing at all to do with tax!!! Also, the interest cost of money is not a notional cost – it is a real cost.)
adarsh1997: Notional means ‘pretend’ and the most likely place it will be relevant in the exam is in the calculation of Residual Income. The interest subtracted in arriving at the Residual Income is not actually charged to the division – it is notional or pretend interest simply for the calculation.
In other contexts, whether it is relevant or not depends on why it is being charged and the wording of the question.
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