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My question relates to AVTO June 2003.
It says that tax allowable depreciation is 25% on a reducing balance basis.
The cost is 580m. The after tax realisable value of the machinery after 4 years is estimated to be 150m.In year 4 it calculates TAD as usual at 25% to be 61m on a written down value of 244m.
And in the calculation of cash flows it includes 150m realisabale value as cash inflow in year 4.Is this correct?
If we take 150m in year 4 as a cash inflow, I think we must simply calculate ballancing allowance or cgarge in year 4.
Or if we assume that it is realised AFTER 4 years then we must include 150m as an inflow in year 5.
I’m confused.
Please help.
Two things.
Firstly the sale proceeds occur at the end of the 4th year, which is time 4. So that is correct.
Secondly, although there would usually be a balancing charge or allowance to account for, note (ii) says that the 150M is the after tax realisable value. Therefore the answer has assumed that this is after any tac on the balancing charge.
(It is an assumption, but a sensible one, but as always in P4 a lot does depend on your assumptions. Provided you state your assumption always (and is is sensible), then you still get the marks even if you answer differs from the examiners answer.
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