Question

A machine costing $800,000 is purchased for one of the company’s projects. The useful life of the machine is 6 years. At the end of year 6, the estimated scrap value of the machine is $200,000. Capital allowances, when allowed, are claimed at a rate of 20% per annum using the reducing balance method with the standard adjustment when selling or scrapping an asset. The corporate tax rate is 28%. The company uses a discount rate of 12% when valuing its projects. In the capital investment appraisal exercise, calculate the capital allowance tax relief and its present value.

Answer 1

GIVEN:

1. CP of Machine = $800,000 Let : CV = Current Value and TA = Tax Assessment

2. Useful Life = 6 years

3. Scrap Value = $200,000 Note : While calculating CV ,Depreciation will be considered after deducting Scrap (Residual Value) .

4. Capital Allowance Rate = 20%

5. Corporate Tax Rate = 28%

6. Discount Rate = 12%