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Investment appraisal – Further aspects of discounted cash flows

Question 5

Tax-allowable depreciation

An asset is bought for a project at a cost of $25,000 and will be used for four
years before being disposed of for $5,000. Tax-allowable depreciation is
available at 25% reducing balance and the tax rate is 30%.

Calculate the tax allowable depreciation and hence the tax savings for each
year if tax is paid (and saved) a year in arrears.

tax rate 1 year in
30% arrears

asset purchase 1st day of accounting
t0 period 25,000

t1 1st tax-allowable depreciation 25% 6,250 1,875 t2
––––––

tax written down value 18,750
t2 2nd tax-allowable depreciation 25% 4,688 1,406 t3

––––––
tax WDV 14,062

t3 3rd tax-allowable depreciation 25% 3,516 1,055 t4
––––––

tax WDV 10,546
t4 sales proceeds 5,000
balancing allowance 5,546 1,664 t5

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