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Hello Tutor, For PYQ June 2009 Q1 part (a)
1)For the indirect cost (Activity-based allocated costs) and interest charge, why the answer not added the full amount but its after-tax? will not be double counting for int rate in the discount rate and the irrelevant cash flows should be removed entirely?
2)The proceed of the sale of the asset($7m) can be offset by the site clearance and reinstatement costs($2m) or must be accounted for separately?
3)Is it usually the residual value or terminal value is not taxable? as its always inserted after the post-tax net cash flows? ( in general terms not only for this question)
4)As the question is assumed the Capital allowance is claimed now (time 0) rather than in the year-end which is time 1 and if I start claiming in the year end, will it still be correct?
Thank you in advance 🙂
1. The flows given in the question are after tax.
So the flows in the question have calculated the cash flow and then calculate tax on those flows.However the flows include interest and the allocated costs. They should be not included, and therefore the tax effect should not be included either. So they are both added back after tax.
2. The proceeds of sale are already included, so it is only the site clearance cost that needs bringing in.
3. The sale proceeds affect the capital allowance calculation in the final year. If you are unsure please watch my Paper FM (was Paper F9) lectures on investment appraisal with tax where I explain how capital allowances work.
4. Yes – it would be correct.
Thank you for your explanation and I have one more query which is the clearance cost will be entitled to the tax deduction if the question is silence? (tax allowable expense)
Thank you.
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