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SW co has 31 Dec year end and pays tax at a rate of 30%. 12 months after the year end to which cashflow relates. It can claim tax allowable depreciation at a rate of 25%reducing balance. It pays $1m for a machine on 31 Dec 20X4. SW co cost of capital is 10%. What is the present value on 31 Dec 20×4 of the benefit of the first portion of tax allowable depreciation?
Sir still I have 1 confusion in the above question, here the first cashflow is on the last day of accounting period (i.e at the end of the first year)? Correct?
Also when we say that if tax is payable in arrear and if first cashflow is on the last day of accounting period (i.e at end of first year) then first tax effect is at year 1. Here by first cashflow , do we mean to say initial investment or do we mean to say operation cashflow?
The investment in the machine is on 31 December X4 – this is time 0.
Capital allowances are calculated at the end of the accounting period – so they are calculated on 31 December X4. The tax saving is one year later, so 31 December X5 and so at time 1.
Yet again, all of this is explained in detail in my free lectures.
Sir in your lectures you have explained that if tax is payable in arrear and if first cashflow is on the first day of accounting period (i.e time 0) than first tax effect is at time 2. However if first cashflow is on the last day of accounting period (i.e time 1) then first tax effect is at year 1.
So in above example as you are saying that first tax saving is at time 1, so in this example is first cashflow on the last day of accounting period (i.e time 1)?
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