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Hi,
I have a question relating to the taxation of residual value cashflow. For example, the company buy an asset and it has expected residual value of $50. As I understand when we calculate the NPV of the project, $50 will be a cash inflow but there will no tax since the company is not actually making any profit on selling the asset. However if the comapny is able to sell the asset for example at $70 then will the premium of ($70-$50) will be taxed?
Thank youFirstly, when calculating the tax allowable depreciation the expected residual value is not taken into account.
Secondly, when calculating the NPV we take whatever cash flows we expect including the expected proceeds of sale and make the decision as to whether or not to invest on that basis. We will not know what the actual sales proceeds will be until the end of the project and we obviously cannot then change the decision.
The sale proceeds are not taxed separately. In the year of sale there is a balancing charge or allowance of the difference between the sale proceeds and the tax written down value.
All of this is explained in my free lectures on Investment appraisal with taxation. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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