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  4. Dear Sir

    Why didn’t you mention the relating yearly depreciation of new machine? I think, when we buy new machine, we have to take account yearly depreciation expense into the cash flows of project.

    is the depreciation expensive irrelevant to the project’s cash flows? If depreciation expensive is relevant to the cash flows, how do we deals with ? we add or subtract depreciation expensive into cash flows. I were really confused depreciation expenses relating to the project’s cash flows and i didn’t how to treat it well. Could you please explain and make me clear.

    moreover, you mentioned in the lecture as follows: “Capital allowance another word is tax allowable depreciation” so, is there any difference between the Capital allowance and the depreciation expense? are they the same.

    Please help me clear.

    Thank you Sir in advance

    • Depreciation is not a cash flow, and with NPV calculations we are only looking at cash flows.

      The tax authorities have their own rules for tax allowable depreciation (which is not the same as the accounting depreciation) and the rules are always given in exam questions. Again, it is not a cash flow, but it does reduce the taxable profit and therefore save tax (and tax itself is obviously a cash flow).

      Have you not watched the earlier lectures?

  8. Thank you very much for this lecture. This has been giving issues for long. However, I’m confused as to why you didn’t calculate annual allowance when considering the capital allowance. Please elaborate. Thanks in anticipation.

  10. Hello,Sir.
    Your lectures are extremely comprehensible and I’ve learnt a lot of things that I didn’t know about.I just have a quick question,how would we treat the capital allowances if they were on a straight line basis rather than on a reducing balance basis?

  11. Sir,
    I have two questions;
    1) If the project is acquiring a company, will we still calculate a balancing charge/allowance?
    2) My capital allowances on NCAs are (in millions) :
    2016 – 拢351.96
    2017 – 拢326.40
    2018 – 拢316.61
    2019- 拢307.11

    Both tax payments and capital allowance claims occur one year in arrears.
    I’m confused as to when will the first tax saving occur?

    Also,
    The project life is 2016-19.

    Thank you!

  12. Thank you for a wonderful lecture Sir. This may sound a bit silly but I am failing to understand why the tax saving only starts in year 2. This is my thinking,we bought the machine in Year 0. at the end of which we will calculate the capital allowance. however the tax is to be paid in arrears so we will make the saving at the end of year 1.

    In any case I thought to say the tax is on the net operating cashflows. Tax on the first year flow will be paid in year 2. Therefore we can match the saving to the operating flows. Is it a logical assumption, would it prove true in any other situation?

    • There is no such thing as year 0. It is time 0, and time 0, time 1 etc are points in time that are 1 year apart (so that we are able to discount in whole years).

      Time 0 is the start of the first year.
      Time 1 is the end of the first year – because it is one year later (we are not bothered about the odd day).
      Time 1 is also the start of the second year (again, we are not worried about the odd day when is comes to discounting).
      Time 2 is the end of the second year and the start of the third year.
      And so on…..

      For operating flows (revenue and expenses) we always assume (unless the question says different) that they occur at the ends of years.
      So the first years revenue is at the end of the first year – which is time 1.

      For capital allowances, the initial investment is at the start of the first year (time 0).
      The first allowance will be calculated at the end of the first year (time 1). If the question says that tax is payable immediately, then the tax effect will therefore also be at time 1.

      However, if the question says that there is a 1 year delay in tax, then although the allowance will have been calculated at time 1, the actual tax effect will be one year later at time 2.

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