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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 6250 1875 1
Depreciation 4687.5 1406.25 2
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
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.