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Thanks a lot for the lecture. However, I am a bit confused with the tax savings of the machine for example 3.
As you explained, the machine will receive 4 years of capital allowance for operating + 1 year of allowance for scrapping. But if contrasted to the last chapter (Chapter 9 Example 4), the machine has 3 years of operating life but only 3 years of allowances are received. What differentiates the 2 problems?
Thanks a lot!
Hello Mr. Moffat.
I want to say that I really enjoy your lectures and I really appreciate your time and effort you put into delivering those to us!
I have a question regarding the tax timings though. I understand the logic on why we put the tax saving in a later timing. The thing which I do not understand is why, on the lease decision we put the tax saving on time 1 and in the buy decision we put the tax saving on time 2. Shouldn’t those be on the same year in both cases, and more specifically in time 2?
Thank you in advance,
Georgios
It is the other way round – the first tax saving when we lease is at time 2 and when we buy it is at time 1.
I do explain this in the lecture (and in the earlier lectures on investment appraisal with tax).
If the question says that tax is payable with a one year delay, then it is payable one year after the end of the accounting period. So if a flow occurs at the end of an accounting period (as it does when we buy in this question) then the tax effect is 1 year later. If a flow occurs at the start of an accounting period (as it does when we lease in this question) then the tax effect is 2 years later (one year until the end of the period and another year delay on the tax).
Good day Sir John,
Why did you start one tax saving in year 2 and another in year 1. Please explain
I do explain this in the lecture (and in the earlier lectures on investment appraisal with tax).
If the question says that tax is payable with a one year delay, then it is payable one year after the end of the accounting period. So if a flow occurs at the end of an accounting period then the tax effect is 1 year later. If a flow occurs at the start of an accounting period then the tax effect is 2 years later (one year until the end of the period and another year delay on the tax).
Hello, please if in the question you are given cost of capital as 20% and cost of borrowing from the bank as 14%, how do you decide on the discounting factor rate to use ?
@06.20. You know your students very well.
馃檪
hello Jhon
If we are leasing, the ownership will be transferred to the company at the end. Why aren’t we taking the effect of allowances of 25% in the lease as well.
Thanks
Because the company leasing the asset will not get capital allowances. Instead, the lease payments reduce the taxable profit and therefore save tax.
Indeed the tax aspect is a bit tricky but well understood. Thank you sir
You are welcome 馃檪
Nkechi is correct – lease payments reduce the taxable profit and therefore result in a tax saving. This is the UK tax position (as per Paper TX).
I really do not understand why in Lease table you account for Tax saving as 30% of lease payment. Is it something usual for Britain? If you lease you have not to pay tax for property, so you should 30% multiply to potential property balance, no?
Tabushew,
That’s a tax saving on the lease payment. Just like you have tax savings on depreciation.
Please explain Bpp practice and revision kit (june18) question number 157
You must ask this sort of things in the Ask the Tutor Forum, and not as a comment on a lecture.