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Capital Allowances (Straight-line Basis) in NPV Calculation

Forums › ACCA Forums › ACCA FM Financial Management Forums › Capital Allowances (Straight-line Basis) in NPV Calculation

  • This topic has 5 replies, 3 voices, and was last updated 15 years ago by Shunmas.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 13, 2010 at 7:46 am #43877
    Shunmas
    Member
    • Topics: 17
    • Replies: 87
    • ☆☆

    Hi !

    In June 2008 Q4, the question states:

    “…SC Co. pays tax 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co. can claim on a straight-line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four-year period.”

    In Answers, the examiner has done this:

    Capital Allowances = Cost/Life = $1 m/4 yrs = $250,000 per year [for all four years]

    In December 2008 Q3, the question states:

    “…Rupab Co. pays taxation one year in arrears at an annual rate of 25%. Capital Allowances (tax-allowable depreciation) on machinery are on a straight-line basis over the life of the asset.”

    In Answers (workings), the examiner has done this:

    Capital Allowance = Cost/Life = $2.5 m/5 yrs = $500,000
    Annual Tax Benefit = $500,000 x 0.25 (25%) = $125,000 per year [for all five years]

    The Question is:

    Why in June 2008 Answers, the examiner has not calculated the tax benefit as he has done in December 2008 Answers ? He put $250,000 for all four years in June Answers and in December Answers, he is multiplying the capital allowance further with tax rate. Why is that so?

    Thanks

    May 13, 2010 at 10:29 am #60342
    acltang72
    Member
    • Topics: 18
    • Replies: 183
    • ☆☆☆

    Hi, I’m using the BPP kit 2009 edition and the solution for June 2008 shows the capital allowance with an allowed tax benefit of 30% ($75,000 per year). Must be a printing/typing error on your answer page

    May 13, 2010 at 8:39 pm #60343
    Shunmas
    Member
    • Topics: 17
    • Replies: 87
    • ☆☆

    Hi !
    Thanks for your reply. There could be printing/typing errors in exam kits but the answers on ACCA website..is questionable as ACCA being more professional and professional website.

    May 13, 2010 at 8:53 pm #60344
    Shunmas
    Member
    • Topics: 17
    • Replies: 87
    • ☆☆

    Hi again !

    Have a look at this page and see what HMRC is saying about Capital Allowances (Straight Line) at the end with example.

    https://www.hmrc.gov.uk/manuals/pimmanual/pim3005.htm

    Example: Buy a machine for £1000. Estimated life: 25 years…yearly capital allowance (fixed) is £40.

    But still confused…

    Thanks

    May 14, 2010 at 8:06 am #60345
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 111
    • ☆☆

    The ACCA’s answers for both diets are correct. Firstly, tax is based on accounting profits (of course, we need some adjustments in actual tax computation).

    At Jun one, the approach of the answer is on accounting, or called accrual, basis so that the tax payment can be directly calculated by deducting depreciation allowance from the contribution. Mathematically, After-tax cash flow = (Cash contribution – Depreciation allowance) x (1 – Tax rate) + Depreciation allowance

    Conversely, the information at the question at Dec is on cash basis. The answer calculates the tax payment on cash basis first. Thereafter, it has to add back the tax saving on depreciation allowance. Mathematically, After-tax cash flow = Cash contribution x (1 – Tax rate) + Depreciation allowance x Tax rate.

    You should see that the above 2 formulas are identical after simple mathematically reconciliation.

    May 17, 2010 at 4:06 am #60346
    Shunmas
    Member
    • Topics: 17
    • Replies: 87
    • ☆☆

    Thanks SosoLogos

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