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Hello,
June 2015 – question 5
When using straight line basis for capital allowances, we take the cost – depreciation/ number of years
5m – 0.5m/4 years = 1125000 – the capital allowance will then be 1125000 * 30% = 337500.
I don’t have a problem understanding the above workings,But what I don’t understand is, suppose the machine could be depreciated for tax purposes over 6 years but the investment will only last for 4 years, and the disposal value on the 4th year will be say 0.5m.
Initial cost = 5m
Disposal value = 0.5m
Investment life = 4 years
Capital allowance on investment is claimed over 6 years – straight line basis
So will this be right,
Dep = 5m – 0.5m / 6 years = 750000 per annum
Years Cashflows Dep C/A – tax at 30%
1 5m 750000 225000
2 75000 225000
3 75000 225000
4 75000 225000Will this be right and do I need to allow for any balancing charge/allowance on the 4th year OR 6th year
I have watched your lectures on investment appraisal, but had this doubt.
It is the same rules whether using reducing balance or straight line depreciation (although straight line is very rare in the exam because it is not what happens in real life).
In the final year (here the 4th year) there is a balancing charge or allowance of the difference between the sale proceeds and the tax written down value.
You cannot be still getting allowances after the asset has been sold!!
Maybe this is obvious, but I just want to confirm if i understood you correctly
Dep = 5m – 0.5m / 6 years = 750000 per annum
i have used 6 years instead of 4 years because capital allowance can be claimed over 6 years OR should I use 4 years ??
Years CFS Dep C/A @ 30%
1 5m 750000 2250002 4250000 750000 225000
3 3500000 750000 225000
4 2750000
(500000) disposal value
= 2250000 675000 (2250000 *30%)
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