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Dear Mr. Moffat,
Thank you for your support. It’s been priceless.
I have a challenge with question 157 of the BPP practice text.
It says that the machine was purchased on the first day of the year of operation, and used for 3 years. I assumed that the first year of operation would be time zero, and would require no maintenance. Then time 1 and 2 would be the second and 3rd year of operation, where we would then charge maintenance cost. This would imply that we charge maintenance cost only twice.
However, in the practice text, it’s treated quite differently.
Could you please assist explain the position of the text?
Also, 30% tax is added back as cash inflow, alongside tax-allowable depreciation. Now I understand why tax allowable depreciation comes as inflow, but why is the tax charge an inflow?
I do not know which book you are referring to, because question 157 in the current edition of the BPP Revision Kit (and I do not have the BPP Study Text).
However, time 0, time 1, etc are points in time that are 1 year apart.
Time 0 is ‘now’. The start of the first year.
Time 1 is one year from now. The end of the first year / start of the second year.
Time 2 is two years from now. The end of the second year / start of the third year.
And so on.
I cannot answer your second question given that I do not have the question. However have you watched my free lectures on investment appraisal with tax?