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the answer presents:
1. CF BUY
tax saved on CA’s 7500 5625 4219 3164 6492 starts from year 1, while isn’t that if tax is paid one year in arrears, then tax benefit of tax-allowable depn’ would also delay for one year and start from Y2?and I really wonder the term of “after 4 years”. Is this referring to CF taking place in Y4 or Y5? Some practises I’ve met suggests this should fall in Y4 while the answer of the notes here refers to Y5???
Practise: It would have a life of four years,after which it would be sold for $5,000. And the answer shows that the $5,000 falls on Y4.
I am a little bit confused by this and would you please solve it for me?
2.CF lease
for this part, tax saved starts from Y2, but I don’t understand that since rental payments starts from Y0 and Y1 should be able to enjoy the benefits instead of Y2 right? since tax is again paid one year in arrears…
Thank you so much for your help.
You must watch the lecture on lease & buy – I really cannot type out the whole lecture here.
First of all, there is no such thing at year 0!
Time 0 is a point in time – it is now.
Time 1 is a point in time – it is 1 year from now.If our year end is (say) 31 December, then if we buy on 31 December (time 0) then the tax is calculated immediately and the effect is 1 year later – i.e. time 1.
If on the other hand you pay for the lease on 1 January (time 0 – 31 December this year and 1 January next year are effectively the same date for discounting purposes. We are not bothered about 1 day!) the the tax will be calculate at the end of the year, and the tax effect will be one year after that – i.e. at time 2.
There is no point at all in using the Course Notes without the lectures. They are lecture notes and it is in the lectures that I go through the examples, explain, and expand. If for any reason you are unable to watch the lectures then you must not use the Course Notes – you must study from a Study Text instead.
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