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September 30, 2023 at 1:59 pm
Hello sir, Thank you for your lectures.
Why are you putting (100k) under 0, aren’t you spending it at the year end of current year?
John Moffat says
September 30, 2023 at 4:55 pm
Time 0 is the date of the first flow (which in this case happens to be the end of the current year).
alawi sayed says
August 29, 2023 at 2:54 pm
Hi Mr John , Thanks for the lecture ,
My question is ,isn’t it and supposed to be that year 0 and year 1 they are the same year , i.e they are one year
the only difference is that Time 0 is the beginning of the year 1 and Time-1 is till the end of the first year is my understanding correct ?
August 29, 2023 at 4:05 pm
Time 0 is the start of the first year. Time 1 is the end of the first year/start of the second year. Time 2 is the end of the second year/start of the third year. and so on.
It matters because we are discounting always for 12 month periods and a flow at the end of the first year needs discounting for one year to get back to present value.
Have you watched the earlier lectures on investment appraisal?
August 29, 2023 at 8:38 pm
I understood now why the tax allowances were for five years because we bought on 31-dec-2016 and time 0 will start 1.1-2017 .
But my question is it possible that the no of allowances will be more the life time of the assets which is here 4 years in this example and the allowances are for 5 years.
August 30, 2023 at 5:15 pm
There is an allowance for each accounting period during which the asset was owned (even if only owned for one day).
July 15, 2023 at 12:36 pm
Sir, Chapter 9 example 3 says,” Buying it will involve borrowing money at an after-tax interest cost of 7% p.a.” So why did you tax 7 % when leasing? Don’t we assume that there is capital for leasing?
July 16, 2023 at 2:17 pm
We discounted at 7% in order to see whether the effective cost of leasing is more or less than 7%.
July 6, 2023 at 8:52 am
Hi John, thank you for these invaluable lectures! With regard to this lecture, I have a question.
When we decide to lease the machine, wouldn’t an opportunity cost be the tax saving from buying it? Why do we not calculate the net tax saving (tax saving of leasing – tax saving of buying) when evaluating the lease option? (Same question applies to when evaluating the buying option.)
Because, I assume we have decided to undertake the project either way and will ultimately either buy it or lease it.
July 6, 2023 at 10:27 am
Similarly, if we decide to buy the asset I guess there would be a saving on the lease payments as an immediate consequence and therefore, there should be an inflow to that extent in the buy appraisal? I guess this applies to every cash flow that wouldn’t happen if the other decision is taken.
July 6, 2023 at 5:10 pm
There are two ways that you can set up the flows.
One is to set out the lease flows and the buy flows (with the associated tax savings for both) separately (as I do in the lecture) and then choose the one with the lowest PV.
Alternatively set out the differences between the two flows and calculate the PV of these differences. The decision will be the same.
To do the first option but show tax savings etc as well would be effectively double counting and would be wrong.
May 3, 2023 at 7:48 pm
Sorry for the wrong questions above,
My question is as per 3rd video of chapter 8 which is in relation with the tax (DCF) , we were not having any capital allowance in the last year of the machine except for balancing charge and balancing allowance whereas, in this video in case of buying we are having a capital allowance in 4th year and balancing allowance in 5th year?
Please explain ?
May 4, 2023 at 8:03 am
In this question tax is payable one year in arrears.
May 5, 2023 at 7:26 pm
Thankyou! for solving it.
May 3, 2023 at 7:28 pm
Why are we having a tax saving in 4th year in case of buying , we don’t charge tax in the last year when the machine is to be sold. ?
May 3, 2023 at 7:25 pm
Why are we having a tax saving in 4th year in case of buying the machine there is no tax in the last year.
March 25, 2023 at 7:33 pm
Mr. John Sir, Please what if there is No one year delay? I know I could use my common sense but please is there a rule you can give for that too?
March 25, 2023 at 7:37 pm
Concerning the tax issue…
March 26, 2023 at 9:34 am
Have you not watched the earlier lectures on investment appraisal with tax? The calculations are the same but the tax effect is in the same year rather than the following year.
March 7, 2023 at 3:32 pm
Dear Sir John,
Thanks for the lectures.
My question is in year 5 why did we not Deduct the cost from the Scrap value and take the tax % age to get the balancing figure to use as a capital allowance like we did when calculating the NPV questions.
March 7, 2023 at 8:34 pm
I assume that you are referring to example 3, in which case we did calculate the balancing allowance as normal.
February 9, 2023 at 7:26 pm
Hi John, the question name is Ufnit Co (Dec 2014, amended). Please let me know if you could find the question. Thank you! 🙂 Daria
February 10, 2023 at 7:36 am
I have found the question, but I am puzzled by your question because it is not a lease and buy question. When calculating the NPV of a project we always discount at the cost of capital, and the cost of capital is always already after tax.
February 10, 2023 at 7:13 pm
Hi John, I wrote my question in the lease & buy lecture because that where you explain after-tax interest rate. I am confused when we should deduct the tax from the discount rate and when we should not. In many question it is explicitly written after-tax discount rate is xx% (e.g. question Degnis Co). But in question Ufnit Co it is written weighted average cost of capital is 12%. So I thought we should deduct the taxes from the discount rate. But no, in the answer the 12% discount rate is applied for the NPV calculation. Or are you saying that regardless the wording in the NPV question we should always assume that the discount rate is already without the tax? Thank you, Daria
February 10, 2023 at 8:51 pm
The weighted average cost of capital is always after tax unless the question specifically says that it is given pre-tax. (Just as I wrote in my previous reply). Have you not watched my lectures on the cost of capital?
February 9, 2023 at 1:18 pm
Dear John, could you please clarify when and when Not to remove the taxes from the interest rate? For example in question 163 on page 60 BPP “Practice & revision Kit, FM” for the exams Sep 22-Jun 23 they dont remove the tax from the interest rate and apply full 12% for the NPV calculation. Thanks a lot in advance! Daria
February 9, 2023 at 4:06 pm
I have a different edition of the kit – please tell me the name of the question (or if no name then the first like of it) and then I will be able to explain 🙂
July 6, 2022 at 1:02 pm
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?
July 6, 2022 at 12:40 pm
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.
July 1, 2022 at 4:10 pm
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).
July 3, 2022 at 4:10 pm
Noted. Thanks for the explanation. 🙂
July 7, 2022 at 8:24 am
You are welcome 🙂
June 28, 2022 at 12:41 pm
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
June 28, 2022 at 3:30 pm
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?
July 1, 2022 at 2:56 pm
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.
July 3, 2022 at 4:01 pm
Dear Sir Johan
These calculations are based on which IFRS?
July 3, 2022 at 4:36 pm
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).
July 3, 2022 at 4:39 pm
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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