Page 447 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Business valuations and market efficiency

Question 8

Tax-allowable depreciation

Based on the figures where the sales proceeds are $5,000 and the asset was
bought on the first day of the accounting period (the original scenario), with net
trading income for the project being $12,000 per annum, calculate the NPV of
the project. The cost of capital is 10%.

t0 t1 t2 t3 t4 t5

net trading income 12,000 12,000 12,000 12,000
tax on net trading
income (3,600) (3,600) (3,600) (3,600)
asset purchase and
sale (25,000) 5,000

tax savings on tax
allowable
depreciation 1,875 1,406 1,055 1,664
––––– ––––– ––––– ––––– ––––– –––––

net cash flow (25,000) 12,000 10,275 9,806 14,455 (1,936)

discount factors 1.00 0.909 0.826 0.751 0.683 0.621

Present values (25,000) 10,908 8,487 7,364 9,873 (1,202)
NPV 10,430

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