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Hi. I’m a little confused about the timing of cash flows in DCF method. Specially in case of a decision regarding lease or buy.
When the tax is payable in arrears, and the asset is bought at the start of accounting year, it would mean that it is bought at start of year 0 and therefore the tax effect is in year 2, this is clear to me completely.
But when the asset is bought at the end of the current accounting year, why does it mean that it is bought just before the start of year 0 and why not at the end of year 0, since year 0 is our current accounting year?Thank you.
Regards
Shamaun0, 1, 2 etc are not years – they are points in time!
Time 0 is now, time 1 is one year from now, time 2 is 2 years from now, and so on.
If an asset is purchased on the last day of an accounting period, then the capital allowances will be calculated immediately and the tax calculated immediately (tax is calculated at the ends of accounting periods). If the tax is payable one year later, then the tax affect will take place in one years time – i.e. time 1.
This tax timing problem only occurs in lease/buy questions (because otherwise it would be too easy 🙂 )
(It should help you to watch the free lecture on lease/buy – there I do use actual dates to hopefully make the point clear.)
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