Sir in December 2009 Question one part (a) BUY
why did the examiner calculate the tax benefit on licence fee?
part (b) why dint the examiner include tax saving for this part of the answer and why did he not deduct 1,000,000 but instead deducted 974,762.
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December 2009 Question 1
10y ago#1As always we assume that the company is currently making profits and therefore currently paying tax.
Therefore if they have to pay a licence fee, it will reduce their existing profit and therefore save them tax.
For part (b) you will see that the examiner has written a not saying that you could instead have brought in the $1M and all the other flows relating to buying (the licence fee, tax savings on license fee, and capital allowance savings).
It would have given a different answer (because they would then be discounted at 11%, whereas the $974,762 is after discounting them at 6%, but this would still have got full marks)
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