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August 5, 2020 at 6:00 am
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!
July 25, 2020 at 11:47 pm
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,
John Moffat says
July 26, 2020 at 9:22 am
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).
July 8, 2020 at 6:50 pm
Good day Sir John,
Why did you start one tax saving in year 2 and another in year 1. Please explain
July 9, 2020 at 7:38 am
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).
May 26, 2020 at 6:26 pm
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 ?
December 8, 2019 at 7:33 am
@06.20. You know your students very well.
December 8, 2019 at 10:48 am
August 24, 2019 at 3:01 pm
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.
August 24, 2019 at 3:19 pm
Because the company leasing the asset will not get capital allowances. Instead, the lease payments reduce the taxable profit and therefore save tax.
August 6, 2019 at 12:01 pm
Indeed the tax aspect is a bit tricky but well understood. Thank you sir
August 6, 2019 at 3:23 pm
You are welcome 🙂
February 22, 2019 at 7:44 am
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).
November 25, 2018 at 4:28 pm
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?
February 21, 2019 at 9:23 pm
That’s a tax saving on the lease payment. Just like you have tax savings on depreciation.
November 13, 2018 at 5:52 am
Please explain Bpp practice and revision kit (june18) question number 157
November 13, 2018 at 7:22 am
You must ask this sort of things in the Ask the Tutor Forum, and not as a comment on a lecture.
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