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Sir,
Could you please explain following calculation?Buy calculation only please:
Cost $20000
Useful life: 5 years
Trade in value: $4000 at the end of 5th year
Tax rate @30%
Depreciation allowance 100% in year 1
Bank interest rate; 13% pre-taxMy calculation: DF @9% (Post tax)
Year 0: (20000) x 1 = (20000)
Year 2: 6000 x 0.842 = 5052 (for depreciation tax allowance: 20000 x 30%)
Year 5: 4000 x 0.650 = 2600 (Scrap value)Hence (12348)
However as per solution – they have calculated balancing charge as 30% x 4000 = 1200
and used DF @ 0.596 in year 6I am lost 🙁
Thanks
There is an allowance of 20,000 intially, and so tax is saved at 30%, i.e. 6,000.
There is a balancing charge (negative allowance) of 4,000 at the end, and so the tax payable on it is 30% i.e. 1,200.
As to the timing, I can only assume that the question says that tax is payable one year in arrears. That is why the tax saving occurs at time 2, and the tax payable on the balancing charge is at time 6.
I think I am still missing your explanation about balancing charge. How did we get that £4000? Is it that scrap value?
Sorry for not getting this 🙁
Thanks for your help.
The balancing charge or allowance is always the difference between the scrap proceeds and the written down value.
Here, the written down value is zero (because there was 100% allowance initially). So there is a balancing charge of 4000 – 0 = 4000.
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