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I was informed by a senior student that in March 2016 the examiner had given us terminal value while calculating NPV.
So I waited for the examiner report and it seems that students were expected to include it as a cash inflow but it was not supposed to be taxable because” capital amounts are not liable to corporation tax”.
Could you please explain what terminal value means, preferably with an example?
The terminal value is the expected value of the project at the end of the period – effectively the scrap value – and is therefore a cash inflow at the end of the period, as always.
Sale proceeds are never taxable (but may give rise to a balancing allowance or a balancing charge).
All of this is covered in our free lectures on investment appraisal.
(Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well)
I’m late to the discussion but I don’t see this covered under investment appraisal lecture. Please tell me where I can find this in detail as I don’t understand how question 32 of Specimen paper Sep/Dec 2017 arrived at 9297 in Year 4 for fixed costs. Please HELP!!
As I wrote before, the way we deal with tax is covered in full in my free lectures on investment appraisal with tax. I really don’t understand how you can say that it isn’t covered – there is a whole lecture on tax!!!!
In Q32, 9297 has nothing to do with fixed costs – it is the tax allowable depreciation (capital allowances).
The tax written down value is 25,000 – 6250 – 4688 – 3516 = 10,546
The value at the end of 4 years (from the question) is 5% x 25,000 = 1,250Therefore the TAD is the 4th year is 10546 – 1250 = 9296. (the difference of 1 is rounding, and is as always irrelevant!).
Hi Sir, with respect to your latest reply. I have managed to figure out 9296. However, I am confused about some parts. The residual value at Yr 4 is 1055. The terminal value is 1250. In this case, you mentioned terminal value is similar to scrap value. If we deduct 1250 from 1055, we would get 9296, and this is amount should be a balancing charge since the sales proceed is greater than the residual value. Therefore, the tax PAYABLE(since it is a bal charge) is 9296 is 9296*30*= 2789, so you should deduct it to cash flows instead of adding it. But the answer given by ACCA showed otherwise, which is a tax relief?? Please help clear my confusion!
Oh wait, my bad. Ive wrongly calculated the difference between terminal value and residual value which gives a negative 9296, hence a bal allowance. (tax relief). Silly mistake 🙁 So sorry sir!
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