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The question is from kaplan exam kit
Investment Appraisal Sec-A Q75A company has 31st December as it’s accounting year end. A new machine costing $2000,000 is purchased on 1 Jan 20X5. The company expects to sell the machine on 31 December 20X6 for $350,000.
Corporation tax=30%
Tax allowable depreciation =25%
Balancing allowance is available on disposal of the asset on reducing balance basis.If company’s cost of capital is 15%
What is the present value of the tax savings from the tax allowable depreciation at 1 Jan 20X5?The answer is $391,000.
I understood that the present value of tax savings was total tax allowances. But why does the question particularly refers to tax allowable depreciation at 1Jan 20X5?
We dont calculate tax as soon as we purchase the asset right?I got confused with that,can you clarify?
Tax allowable depreciation is calculated at the end of each accounting period (as in Paper TX), and the tax saving therefore occurs at the end of the accounting period (unless, as is common, tax is payable one year in arrears in which case the tax saving it one year after the end of the accounting period).
Here the machine is bought at 1 January, which is time 0. The first tax allowable depreciation will occur at the end of the accounting period which is 31 December, i.e. at time 1.
The question is asking for the PV of the tax savings as at time 0 as is normal.
All of this is explained in detail in my free lectures on investment appraisal with tax.
I understand the concept, but my question is why is PV of tax savings referred to 1 Jan 20X5?
Is it normally stated in that way?
I am not available to understand simulation model and probability esrimates , can you please tell me from where i can study these topics in a easy way as open tuition has not made any lecture video for simulation …their notes say that simulation will not be asked in exam but BPP kit hasmany questions regarding it ?
tabasumze: You are misinterpreting the question. It is asking for the PV of all of the tax savings and it wants the PV of them as at 1 January (i.e. with 1 January as time 0). There is no tax saving at 1 January.
Again, have you watched my free lectures on this?jiyaAhuja@1607: In future you must start a new thread when you are asking about a different topic. Your question is nothing to do with what was asked earlier by tabasumze.
Full simulation questions are not asked in the exam, and there are not many questions asking anything to do with it in the BPP Revision Kit. The sort of question you are referring to (which has, from memory, been asked twice in the exam) are little more than questions on expected values (which are covered in the lectures) together with a little basic probability (which is revision from earlier exams). If you are unclear about a specific question then say which one and I will explain (but do start. a new thread to ask 🙂 )
Ohhh! yes..
I’m sorry.I do watch your lectures. I was just in a hurry to complete the section B and interpreted it wrongly.
I’m sorry again
Thank you for clearing it anyway.
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