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Please assist in calculation of the tax on saving on capital allowed in the NPV calculation from the lecture notes
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
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