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How is tax allowable depreciation calculation done on straight line basis in calculation of NPV of Buy option:
If machine cost 560000; Scrap value = 60000 after 5 year & Tax is 20%
Is that Cost / Useful life and then tax %
or Cost – scrap value / useful life and the tax%..?Or is it vary to scenario to scenario …
Kindly resolve me this one…
To calculate the tax allowable depreciation, you would subtract the scrap value ($60,000) from the initial cost ($560,000) to get the depreciable amount ($500,000).
Then, divide the depreciable amount by the useful life of the machine (5 years) to get the annual depreciation expense ($100,000).
The tax allowable depreciation for each year would be the same as the annual depreciation expense ($100,000) since it is calculated on a straight-line basis.
The tax savings for each year would be the tax rate (20%) multiplied by the tax allowable depreciation ($100,000), resulting in $20,000 of tax savings per year.
Or another example
Asset costs 1,000,000
Straight line
divide by no years sat its a four year project = 4= 250,000
Cap allow
Tax @ 30% so it equals 75,000
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