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wanted to find out how the tax savings for year 5 and 6 came up and where the $31 WDV in the suggested solution came from
The workings for the tax savings are show in the answer and are normal reducing balance, except for the final year where the examiners has done it strangely (it was the previous examiner who often did odd things).
He calculated the WDA in the final year (20.7) and then subtracted the sale proceeds to get the balancing charge (8.9) and calculated the tax effect on the two separately at 30% which gave a net saving of 3.5.
What he really should have done was not calculate a WDA in the final year, but instead simply subtracted the proceeds. However this would end up giving exactly the same answer.With regard to the tax WDV of 31.1, I do suggest that you watch our free lectures on this (and if needed, the relevant F9 ones as well because this is revision of F9).
The allowance in the first year is 400 (50% of cost as per the question), and in each subsequent year is 40% reducing balance (again, as per the question).Can u explain a further more on issue on capital allowances at year 6? The question has stated that the residual value will be after 5 years, which at Y5. Hence, why need to claim capital allowance at year 6 when the machine already sold? I cant understand the logic behind this. I hope that u can explain clearly for me. Thanks in advance!
There are no capital allowances at time 6 !!!
The final capital allowances are in year 5, but there is a one year delay in tax (as is almost always the case) and therefore the tax effect it at time 6.
I do suggest that you watch the Paper FM lectures on investment appraisal with tax, because there is nothing different in Paper AFM.
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