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Hey
(Q) Trecor Co plans to buy a machine costing $250,000 which will last for four years and then be sold for $5,000. Net cash flows before tax are expected to be as follows.
T1 T2 T3 T4
$ 122,000 143,000 187,000 78,000
Depreciation is charged on a straight-line basis over the life of an asset. Trecor Co can claim tax allowable depreciation on a 25% reducing balance basis. It pays tax at an annual rate of 30% one year in arrears. What amount of tax relief would be received by Trecor in time 4 of an NPV calculation?(BPP Answer) 10547
(My answer) 7537
Workings:
Year 1
250 – 62.5 = 187.5
Tax savings = 18.7Year 2
187.5 – 46.9 = 140.6
Tax savings = 14Year 3
140.6 – 35.1 = 105.5
Tax savings = 10.5Year 4
105.5 – 5 = 100.5
Balancing allowance = 100.5 x 0.25 = 25.1
Tax savings = 25.1 x 0.3 = 7.5Can you spot what went wrong?
Got it. Tax was to be paid in arrears which means it was the savings of year 3 in T4 which was rightly 10547.
There’s no option to delete the thread. Now that you’re here, is there anything wrong with the way I dealt with tax savings in year 4?
Thanks.
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