Chapter 16 example 1

Capital allowances are like an expense (for tax, they replace depreciation). If the capital allowance is $1,000 and tax is 25%, then the CA reduces profits by $1,000 and this reduces tax by 25% X 1,000 = 250. The machine costs 1,800,000. CAs in the first year are 25% x 1,800,000 = 450,000 This produces a tax saving of 25% x 450,000 = 113,000. The WCV for tax is now 1,800,000 - 450,000 = 1,350,000. Second CAs are therefore 25% x 1,350,000 = $337,500 and the tax saved will be 25% x 337,500 = 84,000 etc

Thanks!!