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RS Ltd is considering using a machine made by BC Ltd. The machine would cost £60,000 and
at the end of a 4-year life is expected to have a resale value of £4,000, the money to be received
in year 5. It would save £29,000 per year over the method that RS Ltd currently uses. RS Ltd
expects to earn a DCF return of 20 per cent before tax on this type of investment.
RS Ltd is currently earning good profits, but does not expect to have £60,000 available
to spend on this machine over the next few years. It is subject to corporation tax at 35 per
cent and receives capital allowances of 25 per cent on a reducing balance basis.I have been having trouble understanding how the how the tax relief on Writing Down Allowance in the 5th year was equal to £7500.
Kindly help.Hi, Thanks for your question.
First thing to say is thet investment appraisal techniques have been removed from CIMA P1 syllabus since 2019.
Also all CIMA questions in dollars (not £s) so Im thinking this is not a CIMA P1 specific question.If youd like to gain more insight over investment appraisal techniques – you could watch the relevant section in the CIMA P2 video have available (this area is on the CIMA P2 syllabus)
However, incase it helps you, ive done a quick calc ( yr0 value of the investment being £60,000 then reducing every year by 25% reducing balance) – ive got the end of year 4 balance to be £18,984 so according to the text you have posted above, in year five we are disposing of it for £4,000. This leaves a balancing allowance of £14,984 which with a tax rate of 35% you will have a tax saving in year 5 of £5244 (£14,984 *0.35). So I do agree with you – I cant see where a figure of £7500 has come from.
I hope this helps
Cath
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