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Dear Sir,
Please help me to explain more detail on Question 1 (ii) about the APV of 2 projects.
The first question was, the disposal value of plant and equipment of Y$ 10 mil. In the question, it just mentioned that Y$ 10 mil was post-inflation. So i thought that, it needs to calculated as CF after tax, which was 10 x (1-0.2) = Y$ 8 mil. But the answer did not deduct tax for disposal value.
When I did other questions with had disposal value, the answer deducted tax from disposal value. Can you help to explain why?The second question related to the financing impact. I calculated the issue cost after tax (in Kaplan textbook, it also guided to deduct tax for issue cost of debt). In the answer, it did not deduct tax. Can you help to explain more?
Thanks Sir!
With regard to the disposal value, we do not charge tax on disposal values. The proceeds are subtracted from the tax written down value and the result is a balancing charge or a balancing allowance. Here there is a balancing allowance of 11,094 which reduces the taxable profit.
This is the standard tax rule – if you are unsure look back at my free Paper FM lectures on investment appraisal with tax because it is revision from Paper FM.With regard to issue costs, questions will usually state whether or not they are tax allowable. If it doesn’t as in this question, then as always in Paper AFM state your assumption.
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