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thank you so much sir, i got the same answer now, so please tell me if i understood this correctly…. this means if cap allowances greater than profits, we get tax saving of the difference? and for all questions except international invest. we do this. and make this assumption?
also sir, can you suggest any question with this similar situation i can practice this concept plz. i did quite a bit of investment questions, but so far blades and tippletine had a loss. however tippletine co. loss was from from operating profit, but also TAD increased the loss BUT in this case the loss was cf….
my answer:
Blades PlcYears 0 1 2 3
Operating Cash flows 220,000 220,000 220,000
Less Taxation- w1 -17250 -45750
Investment -450,000
Cash Flows -450,000 220,000 202,750 174,250
Base Case Discount Rate @16 % -w2 1 0.862 0.743 0.641
Present Values -450,000 189,640 150,643 111,694
Base Case NPV 1,977suggeste answer:
Blades PlcYears 0 1 2 3
Equipment -450,000
capital allowances 94,500 20,250 20,250
Operating Cash flows 220,000 220,000 220,000
Less Taxationon op cf -66000 -66000 -66000Cash Flows -450,000 248,500 174,250 174,250
Base Case Discount Rate 1 0.862 0.743 0.641
@16 % -w2Present Values -450,000 214,210 129470 111,694
Base Case NPV 5374please can you confirm if capital allowances is higher than profits, does it lead to loss c/f. thank you
Good Day, I was doing Blades Plc question, and worked the tax separately then minus it from profits, but i got different answer from the suggested answer, can you please guide me of where i went wrong. also if Capital Alowances is greater than profit will this create a loss c/f?
this is info for tax part of the question and my taxation working:cost of machinery 450,000, The project is expected toproduce net annual operating cash flows of $220,000 for each of thethree years of its life. At the end of this time its scrap value will bezero. Corporation tax is at a rate of 30%, payable in the same year. Themachine will attract a 70% initial capital allowance and the balance isto be written off evenly over the remainder of the asset life and isallowable against tax. The firm is certain that it will earn sufficientprofits against which to offset these allowances.
W1 – Taxation
Years 0 1 2 3Operating Cash flows 220,000 220,000 220,000
TAD W1b -315,000 -67,500 -67,500
Adjusted Cash flows 0 -95,000 152,500 152,500
Offset any profit against
prev losses -95,000
loss c/ftaxable profit 57,500 152,500
tax @30% 17,250 45,750
year paid-same yr2 yr3please guide me to where i went wrong, the suggested answer uses another method but i didnt learn that one and both answers different.
Thanking you in advance.
