- October 20, 2015 at 1:22 pm #277822jiaMember
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sir! can you please explain the following points (I am not very certain about the given answers in textbook actually so kindly clarify them for me):
1. Puxty plc. operates on a 5-year planning horizon.the machine would cost $75m, of which $60m would have to be paid at the start of the project with the balance payable 12 months later. 25% straight-line depreciation on cost is an allowable expense against company tax. corporation tax is 40%. how to calculate tax savings?
2. work all calculations rounded to nearest 10,000 – i.e. $0.01m. (I kind of understand how this works, but an explanation would make it certain.)
thankyou.October 20, 2015 at 6:28 pm #277899John MoffatKeymaster
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The cost of the machine is $75M.
Straight line depreciation at 25% a year is 25% x 75M = 18.75M per year.
They will save tax of 40% x 18.75M = 7.5M per year.
Because it says to round everything to the nearest 10,000 there is no problem here. However best is to write all the figures in ten thousands, so I would write the tax saving as 750 (and head up my cash flow table as “10,000’s”)
The free lectures on investment appraisal (for F9 also, because this is revision of F9) will help you.
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