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What is the impact of
taxation
on
capital investment projects
?
Taxation affects the
viability
of capital investment projects.
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Why are
taxation
payments and savings relevant in a
DCF analysis
?
They are
cash flows
associated with the project that need to be considered.
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What are the two impacts of
taxation
that need to be dealt with in
capital investment
projects?
Corporation tax
(PAYMENT)
Capital allowances
(tax depreciation) (RECEIPT)
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What is typically assumed about the
corporation tax rate
in investment appraisal?
The rate of tax will be given in the
question
.
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How should
net cash flows
from a project be treated for taxation purposes?
They should be considered as the
taxable profits
arising from the project.
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Why is
depreciation
not an allowable deduction for
corporation tax
?
It may be necessary to make adjustments for depreciation.
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When is
corporation tax
typically
payable
?
Corporation tax may be payable in the
year
following
the one in which
taxable profits
are made.
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What do
capital allowances
allow
companies
to do?
They allow companies to write off the cost of their
assets
to reduce company
tax
.
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How are
capital allowances
treated in relation to
taxable profits
?
They are used to reduce taxable profits, leading to a reduction in
tax payments
.
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What is the
capital allowance
rate for plant and machinery in this module?
25%
on a
reducing balance
basis.
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What is a
balancing allowance
or charge?
It is an adjustment made when the selling price of an asset differs from the
reducing balance
amount.
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When do companies receive the benefit of tax saved due to
capital allowances
?
They receive it when the
corporation tax
should have been paid, often one year in arrears.
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How much did
GlaxoSmithKline
invest in the UK for a new factory?
£500 million
.
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What was the expected outcome of
GlaxoSmithKline's
investment?
It was expected to create up to
1,000
jobs.
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What is the expected opening year for
GlaxoSmithKline's
new factory?
2020
.
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How does the
tax cut
influence
GlaxoSmithKline's
decision to invest?
The decision was influenced by tax cuts confirmed in the
Budget
.
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If an asset is purchased for
$50,000
and sold for $10,000 after
four years
, what is the initial cost?
$50,000.
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What is the
capital allowance
for Year 1 if the asset's initial cost is
$50,000
?
$12,500
.
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What is the total
capital allowances
for the asset purchased for
$50,000
?
$40,000
.
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What is the
corporation tax rate
used in the
Lipgloss PLC
example?
30%
.
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How is the tax saved calculated for Lipgloss PLC due to
capital allowances
?
Tax saved is calculated as capital allowances multiplied by the
corporation tax rate
.
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What is the difference in tax effects between
Lipgloss PLC
and
I Spy Ltd
?
Lipgloss PLC benefits from
capital allowances
, while I Spy Ltd does not have any capital allowances.
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What are the key timings of
cash flows
and
capital allowances
in investment appraisal?
Cash flows occur at specific points in time (
Ts
).
Years represent periods of time.
Cash flows may slip one year due to tax payment timing.
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What is the initial investment for
His 'n' Hers PLC's
new piece of machinery?
$100,000
.
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What is the
net cash flow
generated by His 'n' Hers PLC's new machine each year?
$30,000
.
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What is the cost of
capital
for His 'n' Hers PLC?
5%
.
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What is the total capital allowances for
His 'n' Hers PLC's
machinery?
$80,000
.
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What is the
NPV
of the project for
His 'n' Hers PLC
?
$12,791
.
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What is the initial cost of the investment for
Sleeper Ltd
?
$40,000
.
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What is the total capital allowances for
Sleeper Ltd's
machinery?
$21,000
.
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What is the residual value of the machinery for
Sleeper Ltd
?
$19,000
.
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What is the
corporation tax rate
for
Sleeper Ltd
?
30%
.
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What is the
capital allowance
rate for Sleeper Ltd's machinery?
25%
on a
reducing balance
basis.
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What are the key learning points regarding
taxation
and
capital investment
projects?
Corporation tax
impacts cash flows.
Capital allowances
affect
tax depreciation
.
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