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Discounted Cash Flow Further Aspects, Lease versus Buy – ACCA Financial Management (FM)

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  1. Dear Sir,

    You can ignore my last question. I looked at the way the answer is structured in the lecture notes and I seem to have understood now.

    On the other hand, just to confirm the logic, is it correct if I say that there is an additional year of capital allowance due to Taxation rules, yet in terms of depreciation it is still 4 years which is based on the actual usage of the new machine?

    Thanks again.

    Regards,
    Tim

  2. Dear Sir,

    Thank you again for another great lecture.

    I understand that there is a 5th year (or Time 5) of capital allowance/depreciation due to the actual usage of the new machine. However, why would we already account for the Scrappage at Time 4? The scrapping is done only at end of usage which should be in Time 5?

    Much appreciated for your guidance in advance.

    Regards,
    Tim

  3. It wasn’t done till year 5.

    There is depreciation in the year in which the asset is bought and for each of the years it is used.

    Usually, assets are bought on the first day of an accounting period, and if it is lasting 4 years then there are 4 years of allowances.

    If the asset is bought on the last day of an accounting period (as is the case in this example) then there is depreciation for that year and then also for the 4 years it is used (so 5 years in total).

  4. Dear Sir John,

    Can I conclude if the payment of the equipment was made on last day of the month, the depreciation of the equipment will have to be done till Year 5 even the sales proceed was in Year 4. Where-else if the payment was made on 1st day of the month, the depreciation will have to be done only till Year 4, assuming the sales proceed was on Year 4

    Thanks

    • Months are not relevant. If the machine is purchased on the last day of an accounting period then there will be tax allowable depreciation calculated at time 0 and for each of the following 4 years.
      If it is purchased on the first day of an accounting period then there will be tax allowable depreciation just in each of the 4 years in which it is used.

      When the benefit of the TAD is received depends on whether tax is payable immediately or with a one year delay.

      Have you watched the free lectures on investment appraisal with taxation where the tax rules are all explained?

      • Dear Sir John,

        Yep. I did. I was doing a comparison between the topic – “dcf-taxation” and “lease versus buy”. I realised that the depreciation done for the years of sales proceed was different.

        For example in dcf-taxation, the depreciation was done till the year where the machine was sold. Sales proceed was in year 4. We do the depreciation till year 4

        But for lease vs buy, it was done till the year 5, even the sales proceed was in year 4.

        I am trying to find the similarity between this 2 topic.

      • Ben: The tax effect at time 5 is because there is a one year delay in the tax (as per the question and as is usual in the exam).

      • Ehsan: IFRS’s are of no relevance to the financial manager (or to Paper FM as a result). They are the ‘rules’ for Financial Reporting and therefore relevant only for the Financial Reporting exams.

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