Hi John
I have a problem with solution to below question:
Jones Ltd plans to spend $90,000 on an item of capital equipment on 1 Jan 20x2. The expenditure is eligible for 25% tax-allowance depreciation, and Jones pays corporation tax at 30%. Tax is paid at the end of the accounting period concerned. The equipment will produce savings of $30,000 per annum for its expected useful life deemed to be receivable every 31 Dec. The equipment will be sold for $25,000 on 31 Dec 20x5. Jones has a 31 Dec year end and has a 10% post-tax cost of capital.
What is the present value at 1 Jan 20x2 of the tax savings that result from the capital allowances?
A) $13,170
B) $15,828
C) $16,018
D) $19,827
The way i would do it:
$90,000x25%=22,500x30%=6,750 tax savings x DF10% of .909= $6,136 but there is no option to this solution
I dont understand why the question asks for present value at 20x2 and the solution to this question is $15,828 where present values of tax savings from all years from 20x2 to 20x5 are added.
Can you please advise?
Regards
Marta
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Kaplan MCQ 55 Investment appraisal
You have only discounted for 1 year, but the allowances will continue for each year of the project.
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