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Hi, I am a bit confused with the Example 3 in chapter 9 of the study note, could anyone help?
The question is as below:
A company is considering whether to buy a new machine at a cost of $100,000 or to lease it. Buying it will involve borrowing money at an after tax interest cost of 7% p.a. If the machine is bought, it will be bought on the last day of current financial year. The machine will be needed for four years, and will have a scrap value after 4 years of $10,000. Corporation tax is 30% ( payable one ye after the end of the financial year). Capital allowance is 25% reducing balance.The answer shows that the tax saving started in the year 1: Year 1 – £7500, Year 2 – 5625 and so on.
I can’t understand why the tax saving starts in the year one instead of year two. Please help.
Many thanks.
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Hello
as in the scenario, please pay attention to phrase” the machine will be bought on the last day of current financial year” and other phrase ” corporation tax is 30% payable one year after the end of the financial year”the amount of capital allowance should be release in T0 and tax relief should be recieve in T1 instead of T2.
If the machine bought in first day of financial year. capital allowance will be release in T1 and tax relief will be in T2.
hope understand.
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