Tax Relief on straight line basis in NPV

VVis2y ago

How is tax allowable depreciation calculation done on straight line basis in calculation of NPV of Buy option: If machine cost 560000; Scrap value = 60000 after 5 year & Tax is 20% Is that Cost / Useful life and then tax % or Cost - scrap value / useful life and the tax%..? Or is it vary to scenario to scenario ... Kindly resolve me this one...

IIanTutor2y ago#1

To calculate the tax allowable depreciation, you would subtract the scrap value ($60,000) from the initial cost ($560,000) to get the depreciable amount ($500,000). Then, divide the depreciable amount by the useful life of the machine (5 years) to get the annual depreciation expense ($100,000). The tax allowable depreciation for each year would be the same as the annual depreciation expense ($100,000) since it is calculated on a straight-line basis. The tax savings for each year would be the tax rate (20%) multiplied by the tax allowable depreciation ($100,000), resulting in $20,000 of tax savings per year. Or another example Asset costs 1,000,000 Straight line divide by no years sat its a four year project = 4 = 250,000 Cap allow Tax @ 30% so it equals 75,000

VVis2y ago#2

Thanks

IIanTutor2y ago#3

Your welcome