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Hi There
The answer for Chapter 16, example 1, is there an error?
The Working capital at Year 0 is (200), however, it should be recovered in Year 5, then the 200 in Year 5 should be positive. However the example indicate another (200). Is this correct?
BTW, can you tell me how to calculate the capital allowance 113, 84, 63,47 and (107)
Much Appreciated
Hi.
You are correct – the200 at time 5 should be positive. (However it does not change the NPV because the total cash flow at time 5 is correct).
The capital allowance at time 1 is 25% x 1800 = 450. So the tax saved at 25% is 25% x 450 = 113.
It is reducing balance, so at time 2 it is 25% x (1800 – 450) = 337.5 and the tax saved is 25% x 337.5 = 84.
The same each year until the last year, when you do not take 25% cap allnce, but instead you subtract the scrap proceeds (1000) from the reducing balance. There is a balancing charge of 25% of the remainder.
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