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The initial investment will attract tax-allowable depreciation on a straight-line basis over the four-year project life. The
rate of corporation tax is 30% and tax liabilities are paid in the year in which they ariseTotal tax-allowable depreciation = 5,000,000 – 500,000 = $4,500,000
Annual tax-allowable depreciation = 4,500,000/4 = $1,125,000 per year
Annual cash flow from tax-allowable depreciation = 1,125,000 x 0·3 = $337,500 per year
sir please i dont understand why the tax allowable is calculated this way. i got 375 and even with scrap.
thanksUsually, the capital allowances are based on the original cost (in which case your 375,000 would be correct).
However, the question says that it is straight line depreciation. Straight line depreciation is (cost – expected scrap proceeds) / expected life.
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