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This question focus on the tax savings on capital allowance. I have three problems:
(1) indirect allocated costs are not relevant. I think the allocated costs are relevant to the project and should be deducted from the cash flows. So we should do nothing about them.
(2) the first year allowance takes place in year 0. Does it mean that all the capital allowance takes place at the year when the capital is invested.
(3) The depreciations start from the year when the asset is bought no matter whether it is used or not just like the capital allowance ,right?1. If costs are allocated it means that the total has not changed – it has just been charged between projects differently. Since there is no extra cash flow for the company, they should not have been included in the cash flows and should be added back.
2. The first year allowance is only part of the capital allowances – there is then writing down allowance of 25% reducing balance. The question says that the tax benefit on the capital allowances is in the years incurred.
3. Depreciation is not relevant and depends on the accounting policy. Capital allowances are available no matter whether used or not.
About problem 1, I am totally clear now.
About 2 and 3, can I say capital allowances are available as soon as the capital investment is made. So, in this Q, the first allowance incurs in Year 0 rather than Year 1. Am I right?
Thank you very much!
hi,sir
i have a query that why in bpp revision kit answers they have given CA in year 6 only and not in every year?
many thanks..
They have!
If you read the second paragraph of the question, it says that the figures are already after the tax benefit of capital allowances (and it is these figures that the examiner has used in his answer, and that BPP has copied).
Sir, i have question on the sensitivity analysis of project
How to get the amount of equipment purchase/written down value for year 0 to 6
For year 0 is it correct the calculate as 150/150= 1
But how to calculate for year 1 onwards?
You are not required to calculate sensitivity for each year separately.
If there is 1M extra capital expenditure, then there will be extra CA’s each year (calculated in the normal way) and therefore an extra tax saving each year (calculated in the normal way).
So all we need to do is calculate the PV of the effect over the six years in exactly the same way as if there was a new capital investment of $1M.
Is there a difference in depreciation on shared assets and normal depreciation on the assets of the company?
Because according to me we should have simply added back 4 million depreciation to the post tax cash flow…since they say 4 million has been deducted in arriving at this cash flow. So i would not add 4x 30% tax….rather only 4million.Shared assets are assets that the company already has (which the new project will make use of) and therefore the depreciation will be charged (and tax saved) whether or not they go ahead with the new project.
Therefore neither the depreciation on them, nor the tax saving from them (so the net 2.8M) should be charged when appraising this project.
Sir,
I don’t know whether the initial capital investment of $150 million & $50 million (one year later) is included in the calculation? The same with the depreciation for these investment. Why we add back only the tax benefit from balancing allowance (NBV in year 6 – proceeds from sales)?
Many thanks.
The question says that the flows given in the question include the tax benefit from capital allowances.
There is a tax outflow of 127.50 at time 0. What could this possibly be other than the initial investment of $150 less the tax saving on the capital allowances? Similarly for the outflow of 36.88 at time 1, which is the investment of 50 less the tax saving on capital allowances.
With regard to the tax benefit from he balancing allowance, the last sentence of note 4 in the question says that any tax saving recognised on the unclaimed capital allowance on the disposal has not been included (and, of course, it should be included).
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