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Hi Sir,
My question is regarding the effective time of tax saving when a machine is bought or leased.
In eg3, in case of lease though we have paid in the begnining of the year the tax savings are effective 2 years later, (tax is one year in arrear)
In case of of buy, we have bought the machine on the last day of the financial year we get tax saving on the very next year.
Why there is a difference in lease we have paid earlier it takes 2 years to save tax howerver in buy it is the very next year.
I have written the rule explained by you, but I didn’t understand the logic behind it.
Could you please help me on this topic.
Thanks,
Kawalpreet SinghTax is calculated at the end of accounting periods.
So, if a machine is bought at the end of an accounting period, then the calculation of the tax effect is done immediately and then there is a one year delay.
However, the lease payments are at the beginning of accounting periods, so it is a year before the calculation of the tax (which takes place at the end of the year) and then there is the one year delay.
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Hello… im curious about the difference of answers in NPV if we are using annuity factor rather than discount factor… the question is the example 3 of the lease calculation part in your lecture notes of chapter 9. There is a same kind of question given in kaplan where the lease is 36,000 and post tax is 10% , everything else is same as the question you’ve provided in your notes but the answer given in kaplan book they have calculated using annuity factor although you have done using discount factor. Problem is when i used your method there is a difference in NPV of 25 with the answer in kaplan study text (mine is 94,381 where as kaplans is 94,406)…. I’m confused as to which method to use, whether annuity factor or discount factor and which NPV is correct… Please highlight this for me. Thanks.
The difference is simply because the tables (both the present value tables and the annuity discount factor tables) only give the discount factors to three decimal places and so there are slight rounding differences.
For that reason, you would never be expected in the exam to state an NPV precisely – it is usually asked for to the nearest $1000.
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