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Dear sir, I have a question below
An asset costing $40,000 is expected to last for three years, after which
is can be sold for $16,000. The corporation tax rate is 30%, tax allowable
depreciation at 25% is available, and the cost of capital is
10%. Tax is payable at the end of each financial year.Capital expenditure occurs on the last day of a financial year, and the tax allowable
depreciation is claimed as early as possible.What is the cash flow in respect of tax-allowable depreciation that
will be used at time 2 of the net present value calculation?—
According to the answer, it uses the balance amount of $22500 to x 25% and then x 30% to get the tax deduction amount $1688.
However, if I am not mistaken, aren’t we supposed to use ($22500-$16000=)$6500 x 0.25 x 0.30 to get the tax deduction amount?
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Please help, thank you.
No. The tax depreciation is based on the original cost – it is not calculated in the same way as the accounting depreciation.
When the asset is sold, there is a balancing charge or allowance based on the difference between the sales proceeds and the tax written down value.I explain all this in detail in my free lectures on investment appraisal with tax. (The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well 🙂 )
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