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1. I didn’t understand that why the initial investment in the answer headed “Corrected Project evaluation” has included “$127.5m” for the first year and “$36.88m” for later year instead of $150m and $50m. Although the capital allowances has been calculated on $150m and $50m.
2. Why the balancing allowance tax benefit $3.68m has been added in year 6, whereas the question says that the given cash flows has already included the estimated tax benefit from capital allowances tax purpose.
And even if the capital allowance tax benefit is needed, why for year six only.why not for the other year from year 0-5.
I am away from home at the moment and do not have the BPP Revision Kit with me.
However this was a past exam question, so if you tell me what month and year it was I will then be able to find it and will be able to answer you 🙂
Hi John,
I was just searching for the answer to the OP’s first question. It is Q1 from the June 2009 exam.
Thanks and sorry for reviving an old post.
ChrisThis question was set by the previous examiner and is a very poor question (because of the way that his answer dealt with the tax). It was clear from several of that examiners answers that he did not really understand how to treat the capital allowances (and is one of the reasons why he was replaced).
The 127.5M is the initial cost of 150M less the tax saving on the first year allowance 22.5M (50% x 150M x 30% + 22.5M)
However, even though the tax is in the year in which the liability is incurred, the first tax flow due to capital allowances should be at time 1 and not at time 0.The point about the balancing allowance benefit that was made in the first post is valid.
Fortunately the markers for P4 are good and would have given full credit for doing it properly (even though different from the examiners answer).
The current examiner took over in 2010, and the current examiner is very good. Be careful with questions from the two or three years before then – some of them are OK, but many of them are either very poor questions or are much more difficult than the questions currently being asked.
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