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I have a doubt regarding the future value of 105000 in 2yrs time(note…. Receivable in 2yrs)
10500×1.1(sqr 2) = $127050
But why we have taken 1.1….?
And pre tax 127050/70% = 18150
But in the question its 100%tax allowable dep
So can we take 10500×100(sqr2)
Pls explain thisThe fact that there is 100% tax allowance means that they pay $150,000 but immediately get the tax saving on the allowance of 30% x 100% x 150,000 = $45,000
So the net outflow at time 0 is 150,000 – 45,000 = 105,000.
The minimum revenue in 2 years time is whatever makes the NPV equal to zero.
If the minimum revenue is X, then the after tax inflow will be 0.7X and the PV of the revenue is 0.7X/(1.1^2) and for an NPV of zero, 0.7X/(1.1^2) equals 105,000
Therefore X = 105,000 x (1.1^2) / 0.7 = 181,500.
Have you watched my free lectures on investment appraisal with tax? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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