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An asset costing $40,000 is expected to last for three years, after which
is can be sold for $16,000. The corporation tax rate is 30%, tax-allowable
depreciation at 25% is available, and the cost of capital is 10%. Tax is
payable at the end of each financial year.
Capital expenditure occurs on the last day of a financial year, and the taxallowable depreciation is claimed as early as possible.
What is the cash flow in respect of tax-allowable depreciation that
will be used at time 2 of the net present value calculation?
A $1,688
B $2,250
C $5,624
D $7,500my question is how did they get A $1688 to be time 2
The first TAD is 25% x $40,000 = 10,000 and the benefit is at time 0. This is because the initial investment is at the end of the financial year and therefore the allowance is calculated immediately and there is no delay in the payment of tax.
The tax written down value is now 30,000.The second TAD is 30,000 x 0.25 = 7,500 and the benefit is at time 1.
The tax written down value is now 22,500.The third TAD is 22,500 x 0.25 = 5,625 and the benefit is at time 2.
The tax saving resulting at time 2 is 30% x 5,625 = $1,687.5Have you watched my free lectures on investment appraisal with tax?
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