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Chapter 4

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

Illustrations and further practice

Now try TYU question 6 and additional question on timing of asset purchase
and sale from Chapter 4

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