June 2008 Neptune

Cap value 800 Year 0 - first yr allowance (50%) = 400 1 - reducing balance (40%) = 160 2 - reducing balance (40%) = 96 3 - reducing balance (40%) = 57.6 4 - reducing balance (40%) = 34.56 5 - reducing balance (40%) = 20.7 total cap allowance = 769 cost 800 - cap all 769 = written down value 31 :) or u can wait for tutor reply for better understanding.

muneebnawaz is perfectly correct :-)

Hi all, For the profit on sale of equipment, shouldn't it be a 9 (40-31)...? thanks...~

It is! The profit itself is not a cash flow and so we are not interested. There will be a tax balancing charge on the 9 (and there is in the answer).

Hi all, In which part of the question did it mentioned that the PPE will be sold at the end of the project life...? Thanks...~

It says it has a residual value of 40. (And it was you who mentioned it in your question when you asked about the profit!!!)

I have a question there.Why is the 50% allowance done in year 0(2008)? Why not year 1(2009)?

Th examiner is wrong here. The first allowance would be calculated at the end of the first year (30 June 2009 - time 1), but because he said in the question that the tax timing is 12 months after it arises, then the first capital allowance saving should be on 30 June 2010 (time 2).

Sir, why indirect costs are not considered in the Npv calcualtion? Cant indirect costs be relevant? and Why answer didnt take inflation into account?

Indirect costs/overheads are only relevant if they change as a result of doing the project. Since they are activity based, part of the total has been allocated to the project for profit purposes, but there is no suggestion that the overall total has changed. The fact that the total inflates is of no relevance, for the same reason.