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Sir can you please clarify why have they included capital allowance only for last year.
Is it because the question mention abt last year so we assume earlier years have already been taken.And why have they not included capital investment of 150 and 50 is it because how we dont iclude sunk cost we also dont include initial investment.ThanksThe question says that the cash flows given are “the post tax cash flows……including the estimated tax benefit from capital allowances”
The initial investment must be included (and has been included), as have the capital allowances.
At time 0, the investment is 150M. The capital allowances are 75M (the workings are in the answer) and so the tax saved on the allowances is 75M x 30% = 22.5M
So the net flow at time 0 is 150 – 22.5 = 127.50 (which does appear).Sir how in year 6 the unrecovered allowance is calculated as 0.027 in sensitivity analysis part a?
thank youThe total extra tax saving due to allowances is 30% x 1.0 = 0.3
The tax saving they have had over the 6 years is 0.15+0.039+0.027+0.021+0.015+0.012+0.009 = 0.273
So the extra balancing allowance is 0.3-0.273 = 0.027
Hi Sir, why we no need deduct the sales proceed (7*70%=$4.90) from the cash flow since we have already add the tax benefit on balancing allowance ($3.68m) in the cash flow
The sales proceeds are a cash inflow and so it was correct to have included them.
There is no tax directly on the sales proceeds – it is dealt with by the balancing charge/allowance in the capital allowance calculations (as per UK tax rules from Paper F6).
I do suggest that you watch my free Paper F9 lectures on investment appraisal with tax, where I explain in detail how the tax is applied.
Thank you Sir, i forgot sales proceed is a cash inflow. I know the sales proceed is not taxable and we should be deal with BA/BC.
But how we know the question didn’t tax 30% on the sales proceed? do we need to make any assumption?
Because the question got mentioned the sales proceed $7m have been included in the project’s post tax cash flow (what i understand from question is that project post tax cash flow in Yr 6 $20m already including the sales proceed $4.9million which is net of tax) . So i thought the question already tax 30% in the 7 million. so why we no need add back the tax (30%*7 million) Since we have calculated balancing allowances $3.68 tax benefit in yr 6.
But we never tax the sales proceeds of assets that are getting capital allowances!
Again, I do suggest that you watch my F9 lectures on investment appraisal with tax where I go through the tax rules relating to capital allowances.
Hi sir. my doubt is in the capital allowance calculations. the first allowance be claimed in yr0, 2nd in yr 1, 3rd in yr 2, 4th in yr 3, 5th in yr 4, 6th in yr 5, then the written down value is 25.7 at end of yr 5. According to me, the balancing allowance is 25.7-7=18.7 and tax allowance be available on 18.7. The answer in BPP calculates balancing allowance after calculating 25% for one more year. But according to me, the plant will be sold at end of yr 6. so in yr of disposal,.i.e, yr 6, we should not calculate 25%. and instead calculate balancing allowance.
Where am I wrong??BPP have copied the examiners answer.
Try calculating the balancing allowance without the 25% and you will end up with the same total cash flow (and would be more correct and would still get the full marks) 🙂
thanks for replying. But the cash flow will then be different. Because they said that tje effect of balancing allowance has not been included. they calculate balancing allowance as 25.7 – 25.7*0.25=19.27
19.27 – sale proceeds 7 = 12.27. So on 12.27*30%tax saving=3.68
If i calculate my way, its 25.7 – 7=18.7. 18.7*30% is 5.61
So i will adjust 5.61 in last yr. But they are adjusting 3.68 in last yr.No that is not true.
In the last year the original figures in the question are after capital allowances, and so they are after adding 6.43 in the final year (at 25%). However the question says that they have not dealt with the balancing allowance, which is 12.27 (and the tax saving resulting is 3.68).
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