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In this question the project is for 25 years and starts in 3 years’ tie; dep at 10%. In the solution dep was charged for the first 15 years and not thereafter. Is there any reason for ? I don’t want to just assue . Tanx!
Depreciation is charged for 10 years (not for 15).
The reason is that it is 10% straight line (note i). After 10 years at 10% p.a. the book value will be zero.
Dear Mr Moffat,
When a question says that the revenues “is scheduled to commence in three years’time” and “in three year time”, is there a difference re the point of time to set the correct cash inflow for it? should the revenue will be in year 3 or year 4 of the project then?
Many thanks,
Hanh
Time 1, time 2 etc are points in time. Time 1 is 1 year from now (so we discount for one year), time 2 is 2 years from now (so we discount for 2 years) and so on.
We always assume that operating flows (revenues and costs) occur at the ends of years unless told otherwise.
So if the revenue commences in 3 years time, it means that the first revenue will be in the 4th year (which starts in 3 years time) and we assume that the cash is received at the end of the year which is time 4.
Dear Mr Moffat,
Please would you advice if there is a difference between stating “commences in 3 years time” & “in 3 years time”.
Because note (e) from the question provides with the information that the demolition cost of USD10 mil.would be in three years time, so I think it would be in time 4, but the answer is in the third year.
Thank you very much.
Hanh
The demolition cost is not an operating flow. The questions says you receive 10M in 3 years and so it means we get it in exactly 3 years – i.e. time 3.
(We are discounting for whole years – time 1 is not a year, it is 1 year from now, and so on)
Ah, it is not the operating cost item, I got it now :).
Thanks a lot Mr Moffat.
Hi sir,
With regards to the building costs of 600 and 3,300…the tax saved on capital allowances…is from T? to T?…?
thanks…
From time 4 to time 13 inclusive.
Because (a) it is straight line over 10 years (per note (i)); (b) there is no delay in the tax (per note (h)); and, generation starts in 3 years time, so the first income is in the 4th year (per note (a) and my previous explanations)
Sorry, found out the answer myself and tried to delete the question but could not, so i left it as it is now…
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