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Dear sir I want to ask that in investment appraisal there is a concept of balancing allowance & balncing charge, and the question says we dispose off asset after completion of project so why there is no depreciation in last year rather they just do “WDV- scrap value= balancing allowance” and if I take depreciation in last year and loss/ gain occurs after disposal, NPV answer is same. But why there is no depreciation in last year when Q says ‘disposal after the project’
It is a standard tax rule for UK tax.
The total tax allowable depreciation over the life of a project is the difference between the initial cost and the sale proceeds.
Obviously nobody knows what the sale proceeds will be until the asset is sold, so until the final year a standard rule is applied (usually in the exam 25% reducing balance, but you are always told the rule). In the final year there is a balancing charge or allowance to ensure that the total allowable depreciation is equal to what it should be,
This is all explained in my free lectures on investment appraisal with tax. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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