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Terminal value

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Terminal value

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • May 22, 2021 at 4:43 pm #621459
    vavneetb
    Participant
    • Topics: 175
    • Replies: 125
    • ☆☆☆

    Hi

    How do we calculate terminal value of an asset, I am doing investment appraisal question,
    in here they have said ‘all the investment project must be evaluated over four years, with an assumed terminal value at the end of the fourth year of 5% of the initial investment. I am calculating TAD:
    Basic investment is of 25m and depreciation is 25% at reducing balance and tax is 30%, I have calculated the depreciation as follow, everything is correct accept the TAD in last year which I have calculated 375 and in book they have said 2789, I don’t understand how?

    Depreciation year
    Cost 25000
    Depreciation 6250 1875 1
    Balance 18750
    Depreciation 4687.5 1406.25 2
    Balance 14062.5
    Depreciation 3515.625 1054.6875 3
    1250 375 4

    Also, in question they said company pays tax a year in arrear, does it mean the TAD will start from year 2 as well? in question they have starting claiming from year 2

    May 23, 2021 at 10:32 am #621502
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    The tax written down value after 3 years is 25,000 – 6250 – 4687.5 – 3515.625 = 10,546.875.

    The sale proceeds are 5% x 25,000 = 1,250

    Therefore there is a balancing allowance in the 4th year of 10546.875 – 1,250 = 9,296.875, and the tax saving is 30% x 9,296.875 = 2,789.06.

    The TAD is calculated at the end of each year, but the tax saving occurs 1 year later. So the first tax saving occurs at time 2.

    I suggest that you watch my free lectures on investment appraisal with tax where this is all explained with examples.

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