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After comparing my NPV workings with the solution, I realised that in year 2 and 3, tax of 30% was applicable to the negative ‘taxable profits’. I understand that the taxable profits fell to a negative because of the capital allowances. But why is the solution implying that the tax authorities are increasing Sleepon’s profits by giving them back tax money?
If a project gives a loss we assume that it reduces other existing profits and therefore reduces existing tax payable i.e that there is a tax saving (not a tax repayment).
There is never a question of having to deal with loss relief in the exam.Sir kindly tell me why realisable value is ignored when calculating tax allowable depreciation?
Secondly if two realisable values are given, like in this question, do we always have to pick the lowest one?
ThanksTax allowable depreciation (i.e. capital allowances) never take into account the realisable value until the year of sale when we have a balancing charge or a balancing allowance. It is a Paper F6 tax rule (and remember that it is not the same as the financial account depreciation).
With regard to picking the lowest realisable value – this is not a rule. In practice you obviously will never know when you are deciding whether or not to invest exactly what the realisable value is going to be – you have no choice but to estimate and make assumptions. Most sensible is to assume the worst (i.e. the lowest estimate of realisable value) on the basis that the outcome can only be better. In the exam assume the worst, but always state your assumption and the reasoning behind it.
why is capital allowance is charged on 205 and not on 400 ,i am using kaplan revision kit
I assume that you mean 250 and not 205.
It is because that is what the question says to do – see note (ii) of the question.
Sir why in this question in bpp kit, savings in advertising costs is not a relevant cash flow?
There would only be a saving is they were currently spending the money on advertising.
They are not spending at the moment (because they are still considering the project) and they won’t be spending it in future (because they will use existing advertising).
The existing advertising expenditure is not going to change (whatever it happens to be at the moment) and so there are no cash flow effects at all of starting the theme park in respect of advertising.
Hi John,
Why are the cash flows till year 6???? I thought it should be from yr 0 to year 5 because the question has said that the theme park will attract visitors for at least four years.
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