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Hi sir I just wanted to know when tax applies in the NPV calculation for investment appraisal. As I was confused with some of the solutions in the BPP revision kit. Why are they applying tax rate on the maintenance cost in a lease vs buy question? Shouldn’t tax be applied on profits or net cash inflows (sales -VC – fixed costs) only?
Please explain exactly where tax applies. I have gone through your lectures and notes but it doesn’t specify exactly on what cash flows tax applies
You write that you have been through my lectures and notes, but you can’t have watched the lecture on lease and buy 🙂
With lease and buy questions we are looking at the costs involved of leasing and buying and seeing which is the cheapest. The revenue and other costs will be the same and are therefore irrelevant for the lease / buy decision.
If a lease has maintenance costs and buying doesn’t, then (ignoring any other costs there may be) leasing would result in lower profit and therefore less tax. So paying maintenance saves tax.
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