Lease or Buy

It depends on the date of the purchase and the date of the first lease payment. Without seeing the question you are referring to, I would assume that the lease payment is at the start of each year. The tax will be calculated at the end of the year (so 1 year later) and then the tax effect will be one year later still (so 2 years later i.e. time 2). I would assume (again without seeing the question) that the purchase cost when buying was paid at the end of the current year, in which case the capital allowance would be calculated immediately and the tax effect will be one year later (i.e. time 1). This is all explained with an example in my free lectures on lease and buy.

1. With regard to the writing down allowance when buying, it depends whether the machine was bought at the end of an accounting period (in which case the first tax saving will be at time 1), or whether it was bought at the start of an accounting period (in which case the first tax saving will be at time 2). 2. The question says that the first rent is at the end of the first year. The end of the first year is 12 months from 'now' (time 0) and is therefore time 1. (Time 1, time 2, etc are not years - they are points in time that are 12 months apart. Time 0 is 'now' - the start of the first year. Time 1 is 1 year from now - the end of the first year/start of the second year Time 2 is 2 years from now - the end of the second year/start of the third year. Please do watch my lectures on investment appraisal. (I replied to your other post on lease and buy, and then accidentally deleted the thread. What I had typed four years ago was a typing mistake - what is in the lecture notes and my lectures ic correct :-) )

They will need to start using the machine immediately, whether they buy it or lease it. So the lease starts immediately - all that is relevant is when they make the payments. Either at the start of each year (as is usually the case in exam questions) or at the end of each year (as is the case in this question). Tax is calculated at the end of the accounting period. The effect of the tax occurs one year later (assuming as here that there is a 1 year delay in tax). I cannot really comment on what they have assumed in this question without seeing the whole question. It is always clear what to do in exam questions (we always assume the asset is purchased at the start of an accounting period unless the question says differently.