Discounted Cash Flow Further Aspects, Lease versus Buy – ACCA Financial Management (FM)
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Hi John, thanks very much for all these videos, I’d rather use them than any other resources even if my employer pays for my studies as your method is far superior than the others I’ve seen.
Just a question about the savings on the lease as I thought it would just be the Lease depreciation and Finance cost that would be expensed thus being deducted from the profit and not the whole annual payment although technically at the end of the lease would be the same? Don’t we need to do the IFRS 16 when doing Lease vs Buy questions on FM?
Thank you.
Thank you for your comment.
For Paper FM we treat the whole payment in the same way as we would rent, and assume the whole of the payment is tax allowable (unless, of course, the question specifically said to do differently, but it never has in the exam 🙂 )
I find this with a lot of ACCA questions: the calculations and the concepts themselves are not difficult, so in order to ensure that not everyone passes the examiners have to deliberately make dates and time periods confusing and the language intentionally vague. I suppose though as unfair as it may seem is it representative of the situations accountants find themselves in in the real world.
Sir, I understand the calculation of capital allowances and balancing allowance, but I couldn’t figure out why in the lease vs buy example the scrap value and balancing allowance are shown in a separate year 5 instead of in year 4, even though the machine’s life is 4 years. Is this treatment only applicable to lease vs buy questions, or does it apply in other cases as well?
It depends on what is told in the question about the tax timing. Here the tax is one year in arrears (i.e. after the relevant flow).
Brilliant lessons these three, thank you. Made it much clearer, quite easy really. Now I feel a lot more confident in my ability tackling these questions!
Great 🙂
The profits are taxed before the payment of dividends. However as you write, it would make no difference to the calculation because we use the dividends in the calculation.
Hi sir, hope you are fine. I have doubt regarding the after tax cost of capital, say If we were to assume that the money for this project was entirely raised from equity, we then not make any interest savings and thus there would be no difference if we were to take either before or after tax cost of capital right?