Hello,
I had a doubt related to this question from Kaplan textbook TYU2 Chapter 5.
While I was practicing I had trouble understanding why the tax relief on capital allowances starts at Time 2 on the Purchase option and not on Time 1.
While going through the OT lecture on Lease and Buy, it started on Time 1.
I'm unable to understand where I might be going wrong.
Also
In the textbook, it says we don't calculate tax relief in the year of disposal. But in the OT notes the question said that the machine was needed for 4 years and "after" 4 years the scrap value is $10,000. So that's why in the 5th year we calculated tax saving on the balancing allowance.
But in the Kaplan question it says the economic useful life is 5 years. So I got a bit confused because in the answer tax saving on depreciation was not calculated for 5th year but rather on balancing allowance which I thought it was supposed to be in Year 6.
Sir I need your help. :)
Lease part is clear for me. It's only the buying part that got me confused.
Thank you so much Sir.
(a)
A firm has decided to acquire a new machine to neutralise the toxic waste produced by its refining plant.
The machine would cost £6.4 million and would have an economic life of five years.
Writing down allowances (WDAs) of 25% per annum, on a reducing balance basis, are available for the investment. Taxation of 30% is payable on operating cash flows, one year in arrears.
The firm intends to finance the new plant by means of a five-year fixed interest loan, at a pre-tax cost of 11.4% pa, principal repayable in five years' time.
As an alternative, a leasing company has proposed a finance lease over five years at £1.42 million per annum, payable in advance.
The scrap value of the machine under each financing alternative will be zero.