P4 review questions — OpenTuition Forums

3310zcx11y ago

1. when question says that it claim the 50% first year capital allowance, and tax would be paid in the year they arise. For example: claim 50% first year capital allowance and tax are not delayed, 40% reducing balance capital allowance TAX @30% 0 800*50%=400 Time0 120 1 400*40%=160 Time1 48 2 240*40%=96 Time2 28.8 3 144*40%=57.6 Time3 17.28 So, when prepare the NPV calculations, the Time0 would be added 120, YEAR1 ADD 48, YEAR 2 ADD 28.8, YEAR 3 ADD17.28? AM I RIGHT? THANKS JOHN

John MoffatTutor11y ago#1

Strictly speaking no. The first year starts immediately - time 0. The first capital allowances and the tax saving therefore are calculated at the end of the first year, i.e. one year from now, which is time 1. So although your calculations are correct, the tax savings should all be one year later than you have written.

3310zcx11y ago#2

sorry I posted still on this thread. it might be simple for us to see so as you mean no matter whether we are told the tax are delayed or not, we should be put the first year capital allowance in the TIME 1 if have first year capital allowance? am I right? thanks

John MoffatTutor11y ago#3

No. The strict position is that the capital allowances are calculated at the end of the first year. If there is no delay in tax, then the tax affect occurs at the end of the first year - i.e. time 1. If there is a one year delay in tax, then although the calculation would take place at the end of the first year, the tax effect would then be one year later - i.e. at time 2. (I do suggest that you go back and watch the Paper F9 lectures on investment appraisal with tax where I go through this.)

3310zcx11y ago#4

Yes. John. You might misunderstand my point. What I what to say is if no tax delayed. Let us use the example above. If no tax delayed. Then TIME1 should add 48. TIME2 ADD 28.8 and TIME3 ADD 17.28 If have tax delayed : TIME1ADD 120 TIME2 ADD 48. And TIME3 ADD 28.8 right? Thanks

3310zcx11y ago#5

If no tax delayed ignore the 120. And just start from 48 inTIME1. Right? Thanks.

John MoffatTutor11y ago#6

If no tax delay, then 120 at time 1; 48 at time 2; and so on. The calculations of the capital allowances are not affected by the timing. (There are some old exams where the examiner seemed to do it at random, but what I have written is strictly the correct way.)

3310zcx11y ago#7

Hi. John. Sorry still post on the thread. I read through the F9 lectures. I want to make sure with you for this problems. So. If we were told that claim first year capital allowance and tax is delayed can I write this: 0 800*50%=400 Time1 120 1 400*40%=160 Time2 48 2 240*40%=96 Time3 28.8 3 144*40%=57.6 Time417.28 If we were told claim first year capital allowance and tax is payed in the year they arise: can I write as followings. 0 800*50%=400 Time1 120 1 400*40%=160 Time2 48 2 240*40%=96 Time3 28.8 3 144*40%=57.6 Time4 17.28 is that right? If not could you please pick up where is wrong. Thanks.

John MoffatTutor11y ago#8

If tax is delayed by 1 year, then the tax savings on the allowance are: Time 2: 120 Time 3: 48 Time 4: 28.8 and so on If tax is payable in the year the profits arise, then the tax savings on the allowances are: Time 1: 120 Time 2: 48 Time 3: 28.8 and so on The calculations cannot be any different - it is only the timing that is affected.

3310zcx11y ago#9

Thanks. I understand.

John MoffatTutor11y ago#10

Great :-)