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The suggested answer shows capital allowance saving as 120 in year 1, 48 in year 2, etc….. but i am not able to calculate these figures. Could you please explain me?
can you please suggest me the method of incorporating Capital allowance to cash flow with reference to June 2008 Exam Question 5?
The question says that there is a 50% first year allowance.
So the first capital allowance is 50% x 800 = 400. The tax saved on the allowance at 30% is 30% x 400 = 120.
This brings the tax written down value down to 800 – 400 = 400.
So the second capital allowance is therefore 40% x 400 = 160, and the tax saving as a result is 30% x 160 = 48.
The tax written down value is now 400 – 160 = 240. The third allowance is 240 x 40% = 96 and the tax saving is 30% x 96 = 28.8.
And so on, until the final year when as usual we calculate the balancing charge or allowance by subtracting the same proceeds from the tax written down value.It will help you to watch the free lectures on this (and if needed the Paper F9 lecture on investment appraisal with tax, because this is revision of F9).
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