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J ltd plans to spend $90000 on item of capital expenditure on 1 Jan 20×2. The expenditure is eligible for 25% tax allowable depreciation and Jones pay corporation tax at 30%. Tax is paid at the end of accounting period concerned. the equipment will produce savings of $30000 p.a for its expected useful life deemed to be receivable every 31 Dec. The equipment will be sold for $25000 on 31 Dec 20×5. Jones has a 31 Dec year end and has a 10% post tax cost of capital
1) Sir in the above question, its not mentioned that capital allowance is on RBM or SLM, so in such case what we will assume?
2) Whenever tax is involved in question then we use after tax cost of capital na and if tax is to be ignored in question then we use before tax cost of capital na?
3)If suppose nothing was mentioned in this question that 10% cost of capital is before tax or after tax ,and it was suppose just written that cost of capital is 10%, then in such case 10% would have been assumed to be before tax or would it have been assumed to be after tax?
1. I cannot remember a case in the exam where you were not told what depreciation method is used. If it did happen then the examiner would give full marks for using either method. (Although in real life, it would be reducing balance for tax allowable depreciation.)
2. For discounting we use the after-tax (post-tax) cost of capital. If there is no tax, then there is no such thing as after-tax cost of capital.
3. If the question said that the cost of capital is 10%, then automatically it would be after tax if nothing else was written.
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