- This topic has 3 replies, 3 voices, and was last updated 4 years ago by
.
- Posts
Hello John,
There is a question Brt Co which I need some clarifications on 2 things
1.The production equipment for the new confectionery line would cost $2 million and an
additional initial investment of $750,000 would be needed for working capital. Tax
allowable depreciation (tax?allowable depreciation) on a 25% reducing balance basis could
be claimed on the cost of equipment. Profit tax of 30% per year will be payable one year in
arrears. A balancing allowance would be claimed in the fourth year of operation.
The average general level of inflation is expected to be 3% per year and selling price,
variable costs, fixed costs and working capital would all experience inflation of this level.
BRT Co uses a nominal after?tax cost of capital of 12% to appraise new investment projects-Year 1 2 3 4
$ $ $ $
Tax?allowable depreciation 500,000 375,000 281,250 843,750– In year 4, capital allowance is $843,750. How this figure was obtained? Has they incorporate inflation?
Thanks
Tax benefit (30%) 150,000 112,500 84,375 253,125In the final year there is a balancing charge or allowance of the difference between the tax written down value and any sale proceeds.
The tax written down value after 3 years is 2,000,000 – 500,000 – 112,500 – 281,250 = 843,750.
There are no sale proceeds and therefore there is a balancing allowance in the 4th year of 843,750.
Capital allowances are never ever affected by inflation.
You really must watch my free lectures on investment appraisal with taxation where this is all explained.
Hello Sir, I have a doubt regarding the Lease vs buy of Chapter 9. I am a bit confused with the tax savings of the machine for example 3.
As you explained, the machine will receive 4 years of capital allowance for operating + 1 year of allowance for scrapping. But if contrasted to the last chapter (Chapter 8 Example 4), the machine has 3 years of operating life but only 3 years of allowances are received. What differentiates the 2 problems?
In the example in chapter 8, the machine was bought on the first day of an accounting period and so they get CA’s for that period and the two following period. That is usually the same in most exam questions.
However in the example in chapter 9 they buy the machine on the last day of an accounting period, so they get CA’s in that accounting period and then also in the following years.
(I assume that you are watching the lectures working through the chapters (just using the notes on their own would be pointless) and that you have also watched the lectures on the earlier chapter on Investment Appraisal with tax?)
- You must be logged in to reply to this topic.