Dec 2005 – Sleepon Hotels

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.

You are welcome 🙂

Tax 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.

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.

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.

But the question also says that it will only start working in 1 years time! Therefore the first operating flows will be at the end of the second year i.e. time 2.