Return on Capital Employed [ ROCE ]

ROCE = [ Profit before Interest and Tax / Capital Employed ] * 100

Capital Employed = Equity + Debt
- Not usually used as it uses profit and not cash flows

Return on Equity [ ROE ]

ROE = [ Profit after tax / Equity ] * 100

Shivam ACCA GST Practice

Aditya 120,000 every year for GST advisory Aditya is a businessman, he wants someone to do the
10 year contract file monthly GST returns

Hire another CA - Satyamedh

Shivam is getting 120000 per annum, he wants to sub-contract this assignment
to Satyamedh and pay 90000 per annum 900000

Satyamedh expects a lump sum payment from Shivam - INR 800000

Outflow is happening on Day 1 - 800000

Accounting standpoint
Inflow will happen every year
Income 1,200,000
This is a 10 year project Expense 800,000
Total Inflow 1,200,000 Profit 400,000

Case I
Cost of capital 10% Year Cashflow DF @ 10%
This is my discounting rate 0 -800,000 1
PV of outflow

1 120,000 0.909
2 120,000 0.826
3 120,000 0.751
4 120,000 0.683
5 120,000 0.621
6 120,000 0.565
7 120,000 0.513
8 120,000 0.467
9 120,000 0.424
10 120,000 0.386
1,200,000

PV of inflow

Net Present Value

PV of inflow is 737348 whereas PV of outflow is 800000

Case II
Shivam's annual inflow is still 120000 per year
But, Satyamedh has now asked for 600000 lumpsum on day 1
 Year Cashflow DF @ 10%
0 -600,000 1
PV of outflow

1 120,000 0.909
2 120,000 0.826
3 120,000 0.751
4 120,000 0.683
5 120,000 0.621
6 120,000 0.565
7 120,000 0.513
8 120,000 0.467
9 120,000 0.424
10 120,000 0.386

PV of inflow

Net Present Value

Case III
Shivam's annual inflow is now 140000 per year
Satyamedh asks for 800000 lumpsum

Year Cashflow DF @ 10%

0 -800,000 1
PV of outflow

1 140,000 0.909
2 140,000 0.826
3 140,000 0.751
4 140,000 0.683
5 140,000 0.621
6 140,000 0.565
7 140,000 0.513
8 140,000 0.467
9 140,000 0.424
10 140,000 0.386

PV of inflow

Net Present Value

Net Present Value = PV of Inflow ( - ) PV of Outflow

Decision Rule

If NPV > 0, Accept the project

If NPV < 0, Reject the project
sman, he wants someone to do the GST accounting and

Year Cash Flow DF (@10%)

0 -10,000 1/(1+0.1)^0
1 5000 1/(1+0.1)^1
2 5000 1/(1+0.1)^2
NPV

33.33%

Amount
-800,000
-800,000

109,080
99,120
90,120
81,960
74,520
67,800
61,560
56,040
50,880
46,320

737,400

-62,600
Reject
Amount
-600,000
-600,000

109,080
99,120
90,120
81,960
74,520
67,800
61,560
56,040
50,880
46,320

737,400

137,400
Accept

Amount
-800,000
-800,000

127,260 0.909 127,260

115,640 0.826 115,640
105,140 0.751 105,140
95,620
86,940
79,100
71,820
65,380
59,360
54,040

860,300

60,300
Accept
 DCF
Cash Flow x DF
Cash Flow x DF
Cash Flow x DF
Sum ()
Free Cash Flow
Cash that is not retained and reinvested in the business is called free cash flow.
- It represents cash flow available to all the providers of capital of a company
- to pay dividends or finance additional capital projects.

Uses of free cash flows

Free cash flows are used frequently in financial management:
- as a basis for evaluating potential investment projects
- as an indicator of company performance
- to calculate the value of a firm and thus a potential share price

Calculating free cash flows for investment appraisal

Free cash flows can be calculated simply as:

Free cash flow = Revenue - Costs - Investments

The free cash flows used to evaluate investment projects are therefore essentially the net relevant cash flows

Free cash flow to equity : This is essentially the cash available for distribution to shareholders, so in many
cases just the free cash flow already calculated, but with debt interest also deducted.
e net relevant cash flows

hareholders, so in many
Assumptions used in discounting
- all cash flows occur at the end of a year
- initial investments occur at T0 Start of T2 = End of T1
- other cash flows start one year after that (T1).

Decision Rule

- If the NPV is positive – the project is financially viable

- If the NPV is zero – the project breaks even (just returning enough money to cover the funding costs)
- If the NPV is negative – the project is not financially viable
- If the company has two or more mutually exclusive projects under consideration it should choose the one with the highest NPV
- The NPV gives the impact of the project on shareholder wealth.

Advantages

- considers the time value of money

- is an absolute measure of return
- is based on cash flows not profits
- considers the whole life of the project
- should lead to maximisation of shareholder wealth.

Disadvantages

- It is difficult to explain to managers

- It requires knowledge of the cost of capital
- It is relatively complex.
Question

Calculate NPV if cost of capital is 6%

Year Cashflow DF @ 6% DCF

0 -27,000 1.0000 -27,000
1 7,000 0.9434 6,604
2 12,000 0.8900 10,680
3 8,000 0.8396 6,717
4 7,000 0.7921 5,545

2,545

NPV > 0, Accept

Question

Calculate NPV if cost of capital is 9%

Year Cashflow DF @ 9% DCF

0 -400,000 1.000 -400,000
1 90,000 0.917 82,569
2 110,000 0.842 92,585
3 68,000 0.772 52,508
4 72,000 0.708 51,007
5 59,500 0.650 38,671

-82,660

NPV < 0, Reject

What does NPV mean?

NPV = PV of Inflow ( - ) PV of Outflow

Suppose, in an investment problem, we calculate the NPV of certain cash flows at 12% to be – $97,
and at 10% to be zero, and yet at 8% the NPV of the same cash flows is + $108.

If the funds were borrowed at 12% the investor would be $97 out of pocket
– i.e. the investment earns a yield below the cost of capital.

If funds were borrowed at 10% the investor would break even – i.e. the investment yields a
return equal to the cost of capital.

If funds were borrowed at 8% the investor would be $108 in pocket

– i.e. the investment earns a return in excess of the cost of capital.
% to be – $97,
Salary today 200,000
Salary next year 225,000 225000 is cash actually received. I will ca
An item which was worth 100 last year, is
But, inflation rate is 10% I am getting 225000 this year [ this 22500
Last year, your salary was 200000, they ga
Increase in salary (money terms) 25,000 Then, they said, we will compensate you f
% Increase in money terms 12.50%
100 204,545
10 20,455
110 225,000

My salary in money terms has gone up by 12.5%. 225000 hits my account

But, if I were to remove the impact of inflation, I realise that 20455 is nothing but compensation for general price ris
This 4545 [ 204545 - 200000 ] is my actual growth
My employer has rewarded me peanuts : 2.27%. This is my real growth - Time to switch!!!

225000 which hits my account is the money cash flow or I can call it Nominal Cash flow
204545 is my REAL cash flow (after removing impact of inflation)

I have invested 100000 in bank deposit

Rate of interest 10.00% Money Rate of interest
(Rate of interest printed on my FD Certificate)
Value after 1 year 110,000

Inflation 6% Interest income (as per Govt) = 10000

Suppose you are in 30% tax bracket
Convert cash flow of 110000 in real terms 103,774 Tax = 10000*30% + 4% Cess = 3120

Real Return 3,774 654

Real Return (in % terms) 3.77%

Fisher's Formula
(1 + Money Rate) = (1 + Real Rate) * (1 + Inflation)

( 1 + 10% ) = (1 + Real Rate ) * ( 1 + 6% )

1 + Real rate = 1.10 / 1.06
Real Rate = 3.77%

** In any Investment appraisal question, unless otherwise stated, please use money rate, money cash flow for
sh actually received. I will call it Money Cash Flow/ Nominal Cash Flow
ch was worth 100 last year, is worth 110 this year
225000 this year [ this 225000 includes the impact of inflation ]
ur salary was 200000, they gave an increment of 4545, your salary then came to 204545
id, we will compensate you for 10% inflation and your salary came to 225000

4,545 2.27%

pensation for general price rise

on my FD Certificate)

me (as per Govt) = 10000

are in 30% tax bracket
*30% + 4% Cess = 3120

Last year 100 103,774

Inflation 6 6,226
Present 106 110,000

y rate, money cash flow for solving all the questions

Question

$1,000 is invested in an account that pays 10% interest pa. Inflation is currently 7% pa.
Find the real return on the investment.

Solution

(1 + Money Rate) = (1 + Real Rate) * (1 + Inflation)

(1 + 10%) = (1 + Real rate ) * ( 1 + 7%)

1 + real rate = 1.0280

Real Rate = 2.80%

Question

If the real rate of interest is 8% and the rate of inflation is 5%, what should the money rate of interest be?

Solution

(1 + Money Rate) = (1 + Real Rate) * (1 + Inflation) 1.134

1 + Money Rate = 1.134

Money Rate = 13.40%

ney rate of interest be?
Question

Storm Co is evaluating Project X, which requires an initial investment of $50,000.

Expected net cash flows are $20,000 per annum for four years at today’s prices.
However these are expected to rise by 5.5% pa because of inflation. The firm’s money cost of capital is 15%.

Find NPV using

discounting money cash flows
discounting real cash flows

Solution

Discounting using Money Cash flows

Net cash flow value today [ without considering inflatio 20,000 [ this is at T0 ]
Rate of inflation 5.50%

T1 21,100 [ 20000 + 5.5% * 20000 ]

T2 22,261 [ T1 cashflow +
5.5% ]
T3 23,485 [ T2 cashflow +
5.5% ]
T4 24,776 [ T3 cashflow +
5.5% ]

Calculation of Net Present Value

T0 T1 T2 T3
Cashflows (50,000) 21,100 22,261 23,485
DF @ 15% 1.000 0.870 0.756 0.658
DCF (50,000) 18,348 16,832 15,442

Net Present Value 14,788

Discounting using real cash flows

20000 is net cash flow at today's prices,

Today's prices means that it does not have impact of inflation, that means real cash flows

Using Fisher's formula, real cost of capital is

(1 + Money Rate) = (1 + Real Rate) * (1 + Inflation) 9.00%

Calculation of Net Present Value

T0 T1 T2 T3
Cashflows (50,000) 20,000 20,000 20,000
DF @ 15% 1.000 0.917 0.842 0.772
DCF (50,000) 18,340 16,840 15,440

Net Present Value 14,789

money cost of capital is 15%.

this is at T0 ]

T4
24,776
0.572
14,166
T4
20,000
0.708
14,169
Question

A company is considering a cost-saving project. This involves purchasing a machine costing $7,000
which will result in annual savings (in real terms) on wage costs of $1,000 and on material costs of $400.

The following forecasts are made of the rates of inflation each year for the next five years:

Wage cost 10%

Material Cost 5%
General Prices 6%

The cost of capital of the company, in real terms, is 8.5%.

Evaluate the project, assuming that the machine has a life of five years and no scrap value.
* Ignore depreciation and tax

Solution

Calculation of Net Present Value

Particulars T0 T1 T2 T3 T4
Purchase of new machine -7,000.00
Saving in wage cost 1,100.00 1,210.00 1,331.00 1,464.10
Saving in material cost 420.00 441.00 463.05 486.20

Net Cash flow (7,000.00) 1,520.00 1,651.00 1,794.05 1,950.30

DF @ 15% 1.000 0.870 0.756 0.658 0.572
DCF -7,000.00 1,321.74 1,248.39 1,179.62 1,115.09

Net Present Value = PV of Inflow ( - ) PV of outflow -1,080.64

Working Notes

WN 1 - Saving in wage cost

T0 T1 T2 T3 T4
Wage cost 1,000.00 1,100.00 1,210.00 1,331.00 1,464.10

You can also calculate the Future value of the cashflow by applying the compounding factor [ 1 + r ] ^ n
Wage cost increases by 10%

WN 2 - Saving in material cost

 T0 T1 T2 T3 T4
Material cost 400.00 420.00 441.00 463.05 486.20

You can also calculate the Future value of the cashflow by applying the compounding factor [ 1 + r ] ^ n
Material cost increases by 5%

WN 3 - Calculation of Nominal rate of discounting

Using Fisher's formula

(1 + Money Rate) = (1 + Real Rate) * (1 + Inflation)

1 + M = ( 1+ 8.5% ) * ( 1 + 6% ) 1.1501
M = 15%

Notes

** Any saving of cost means to that extent, cashflow outflow is reduced

It is treated like an inflow

*** Whenever general and specific rates of inflation are given, then
- Use the specific rates to inflate the individual cost / revenue items
- Use the general rate in 'Fisher's formula' to arrive at the money rate / nominal rate to be used for discounting
 costs of $400.

T5

1,610.51
510.51

2,121.02
0.497
1,054.52

T5
1,610.51

or [ 1 + r ] ^ n
 T5
510.51

or [ 1 + r ] ^ n

sed for discounting

 P&L Account - Stage I

Cost of Sales 60.00 Sales 100.00 *All Sales are cash sales and all cost is paid in cash

Profit before tax 40.00 Assume tax rate is 25%

Tax 10.00
PAT 30.00

P&L Account - Stage II

Profit before tax = 100 ( - ) 60 ( - ) 20 = 20

Cost of Sales 60.00 Sales 100.00 Assume tax rate is 25%
Salary 20.00 So, tax will be PBT * 25% = 20 * 25% = 5

Profit before tax 20.00 A cash expense called salary was debited to P&L
Tax 5.00 So, my taxable profit was reduced by 20
PAT 15.00 Consequently, my tax was reduced from 10 in stage I to
There was a cash outflow [ expense ] of 20 and therefo
tax liability of 5
Tax saving = 5 = Amount of expense [ 20 ] * tax rate o

Here, there was an outflow of 20 and due to that there w

P&L Account - Stage III

P&L Account
Profit before tax = 100 ( - ) 60 ( - ) 20 ( - ) 10 = 10
Cost of Sales 60.00 Sales 100.00 Tax @ 25% on PBT = 10 * 25% = 2.50
Salary 20.00 So, profit after tax = 10 ( - ) 2.50 = 7.50
Depreciation 10.00
Profit before tax 10.00 Because of a non cash expense called depreciation whic
Tax 2.50 My PBT was reduced from 20 in stage II to 10 in Stage
PAT 7.50 My Tax payable was reduced from 5 to 2.5

Due to depreciation, profit goes down and consequently

It leads to paying lower taxes; earlier, you were paying
Which means there is tax saving of 2.50
Depreciation expense, unlike salary, rent etc. does not l
But it gives me a tax saving of 2.50

Amount of Tax Saving = Depreciation charged to P&

les and all cost is paid in cash

0 ( - ) 60 ( - ) 20 = 20

25% = 20 * 25% = 5

salary was debited to P&L

was reduced by 20
was reduced from 10 in stage I to 5 in stage II
ow [ expense ] of 20 and therefore, there was a reduction in

ount of expense [ 20 ] * tax rate of 25%

flow of 20 and due to that there was a saving of 5

0 ( - ) 60 ( - ) 20 ( - ) 10 = 10
10 * 25% = 2.50
0 ( - ) 2.50 = 7.50

expense called depreciation which was debited to P&L

from 20 in stage II to 10 in Stage I
educed from 5 to 2.5

rofit goes down and consequently, tax goes down too

er taxes; earlier, you were paying 5 in stage II, now you are paying 2.5 in stage III
tax saving of 2.50
unlike salary, rent etc. does not lead to any cash outflow
aving of 2.50

ng = Depreciation charged to P&L * Tax Rate applicable

Scenario I - Tax is paid in arrears
T1 T2 T3 T4 T5
Net Cash Flow 100 120 150 200
Tax @ 25% -25 -30 -38 -50

Usually, tax is paid in arrears i.e. it is paid in the year following the year in which income is earned
So, if income is earned in T1, tax is paid at the end of T2

In reality, it might be paid earlier. For example. Tax for FY 20-21 is paid in September 2021
But , if we go by these dates, calculation of PV will become very difficult
So, for ease of calculation, we say that tax is paid at the end of following year

T1 T2 T3 T4 T5
Depreciation 25 25 25 25
Tax Saving due to Dep 6.25 6.25 6.25 6.25

** For this to happen, the question will say that tax is paid in arrears

Scenario - II: Tax is paid in the same year in which income is earned

T1 T2 T3 T4 T5
Net Cash Flow 100 120 150 200

Tax @ 25% -25 -30 -37.5 -50

** Question will specifically say that tax is paid in the same year in which income is earned
 Income of 100 is earned in T1 and tax on this 100 is paid in T2
Income of 120 is earned in T2 and tax on this 120 is paid in T3

income is earned

When I record depreciation expense in P&L of year 1, it reduces my taxable profit of year 1
That means, including depreciation in P&L will ultimately lead to payment of lesser tax next year
That means, it will lead to tax saving
Also called "Tax Shield"
 Question

An asset is bought for $10,000 and will be used on a project for four years after which it will be disposed of.
Tax is payable at 30%, one year in arrears, and tax-allowable depreciation is available at 25% reducing balance.

A Calculate the tax-allowable depreciation and hence the tax savings for each year if the proceeds on disposal of the as
B How would your answer change if the asset was sold for $5,000?
C If net trading income (cash flows) from the project is $8,000 pa, based on your answer to part (a)
and a cost of capital of 10%, calculate the NPV of the project.

Solution

Part ( a )

Cost of asset 10,000

Less: Depreciation for year 1 (2,500) T1
Time of tax
Tax saving
saving
WDV at end of year 1 7,500
Less: Depreciation for year 2 (1,875) T2 750 T2

WDV at end of year 2 5,625

Less: Depreciation for year 3 (1,406) T3 563 T3

WDV at end of year 3 4,219

Less: Depreciation for year 4 (1,055) T4 422 T4

WDV at end of year 4 [ end of project ] 3,164

WDV for tax purposes 3,164 316 T5
Sale proceeds of the asset 2,500 199 T5

Loss on disposal 664 T4

Bank A/c Dr 2,500

Loss on disposal A/c Dr 664 Gets debited to P&L
To Non Current Asset A/c 3,164 Allowable expense for tax
So, when this loss occurs,
also leads to a reduction in

Part ( b )
 WDV for tax purposes / Carrying amount 3,164
Sale Proceeds of the asset 5,000

Gain on disposal 1,836

Bank A/c Dr 5,000

To Non Current Asset A/c 3,164
To Gain on disposal A/c 1,836 Gets credited to P&L and g
So, it thereby increases the
This gain leads to tax paym

Gain on disposal occurred in T4, so tax payment will happen in T5

Amount of tax payment = 1836 * 30% = 551

Part ( c )

Calculation of Net Present Value

Particulars T0 T1 T2 T3
a Cost of machinery (10,000)
b Operating cash flow 8,000 8,000 8,000
c Tax on operating cashflow [ b * 30% ] (2,400) (2,400)
d Tax saving on depreciation 750 563
e Proceeds from disposal
f Net cash flow [ - a + b - c + d + e ] (10,000) 8,000 6,350 6,163
g DF @ 10% 1.000 0.909 0.826 0.751
h DCF [ f * g ] (10,000) 7,272 5,245 4,628

Net Present Value 11,796

l be disposed of.
% reducing balance.

eds on disposal of the asset are $2,500.

ets debited to P&L

lowable expense for tax purposes
, when this loss occurs, it also reduces my taxable income and thereby it
so leads to a reduction in tax payment [ tax saving ]
ets credited to P&L and gets added to your taxable income
, it thereby increases the amount of tax payable
his gain leads to tax payment

T4 T5

8,000
(2,400) (2,400)
422 516
2,500
8,522 (1,884)
0.683 0.621
5,821 (1,170)
Balancing Allowance / balancing charge

Step 1
Calculate WDV of the Non current asset at the start of last year of the project

Step 2
Note down the sale proceeds / disposal value of the asset

Step 3
If WDV > Sale Proceeds, it is Balancing allowance - It is an expense
If WDV < Sale Proceeds, it is Balancing charge - Treated like income

On Balancing Allowance ( Expense) - There is tax saving

On Balancing Charge (Income) - There is tax payment

Balancing allowance = Loss on disposal

Balancing charge = Gain on disposal
Funds for day to day operations are needed in addition to the amounts put in for machinery etc

You have to borrow funds from your investor or family or friends to fund your day to day operations as well

And this money is required at the start of the project, i.e. T0

Say you buy stock using this money. You sell it on day 1, you get cash against it and then you use this cash
to fund your needs for day 2

Usually, the Working capital needs are in proportion to sales

So, as sale increases, working capital needs also increase
day operations as well

hen you use this cash

 Question

A company expects sales for a new project to be $250,000 in the first year growing at 8% pa.
The project is expected to last for 5 years. Working capital equal to 10% of annual sales
is required and needs to be in place at the start of each year.

Calculate the working capital flows for incorporation into the NPV calculation.

Solution

Particulars Year 1 Year 2 Year 3

a Sales for the project 250,000 270,000 291,600
b Working capital requirement [ a * 10% ] 25,000 27,000 29,160
c Investment in working capital -25,000 -2,000 -2,160
d Timing of cash outflow Start of year 1 Start of year 2 Start of year 3
e Timing of cash outflow T0 T1 T2
f Release of working capital
g Timing of cash outflow
 Year 4 Year 5
314,928 340,122
31,493 34,012
-2,333 -2,519
Start of year 4 Start of year 5
T3 T4
34,012
end of year 5 = T5
-
 Question

Play Co manufactures safety surfacing for children’s playgrounds. The main raw material required is rubber particle
currently purchased from an outside supplier for $3.50 per tonne. This price is contractually guaranteed for t
If the contract is terminated within the next two years, Play Co will be charged an immediate termination penalty of
which will not be allowed as a tax deductible expense.

The directors are considering investing in equipment that would allow Play Co to manufacture these particles in hou

The machine required to process the tyres will cost $400,000, and it is estimated that at the end of year four th

The costs associated with the new venture are as follows:

Variable costs (per tonne produced) 0.80
Fixed costs (per annum) 192,500

The additional fixed costs include maintenance costs of $40,000 and the additional depreciation charge
(calculated on a straight-line basis over the life of the asset) relating to the machine.

All of the above are quoted in current price terms. Inflationary increases are expected as follows:

Variable costs: 3% per annum

Maintenance costs 5% per annum
Other Fixed cost 2% per annum

The annual demand for the particles (based on the sales forecasts of the company) is:

Year 1 Year 2 Year 3

Demand ( in tonnes) 100,000 110,000 130,000

Profit tax of 30% per year will be payable one year in arrears. Tax allowable depreciation on a 25% reducing balanc
could be claimed on the cost of the equipment, with a balancing allowance being claimed in the fourth year of opera

1 - Using 15% as the after-tax discount rate, advise Play Co on the desirability of purchasing the equipment.
(Your workings should be shown to the nearest $000)

Solution

Calculation of Net Present Value

Particulars T0 T1 T2
a Purchase cost of machine -400.00
b Savings in Purchase cost [ WN 1 ] 350.00 385.00
c Variable cost of production [ WN 2 ] -82.40 -93.36
d Maintenance cost [ WN 4 ] -42.00 -44.10
e Other fixed cost [ WN 5 ] -66.30 -67.63
f Taxable operating cash flows [ b - c - d - e ] 159.30 179.91
g Tax on taxable cash flows [ f * 30% ] -47.79
h Termination penalty -150.00
i Tax saving on depreciation [ WN 6 ] 30.00
j Disposal proceeds of machine
k Total cash flows [ - a + f - g - h + I + j ] -550.00 159.30 162.12
l DF @ 15% 1.000 0.870 0.756
m DCF [ k * l ] -550.00 138.59 122.57

Net Present Value -18.05

Working Notes

WN 1 - Saving of purchase cost

Particulars T1 T2 T3
Demand ( in tonnes) 100,000 110,000 130,000
Purchase cost per tonne 3.50 3.50 3.50
Total purchase cost saved if manufactured internal 350,000 385,000 455,000
Saving in purchase cost [ in '000 ] 350 385 455

WN 2 - Variable cost of production

Cost per tonne [ in today's terms ] 0.80

Inflation rate 3%

Particulars T1 T2 T3
Demand ( in tonnes) 100,000 110,000 130,000
Variable cost of production 0.82 0.85 0.87
Total variable cost [ in '000 ] 82.40 93.36 113.64

WN 3 - Analysis of Fixed Cost

Total Fixed cost = Maintenance cost ( + ) SLM Depreciation ( + ) Other fixed costs

SLM Depreciation per annum = [ Cost - Estimated Residual Value ] / Estimated Useful Life = [ 400000 - 50000 ] / 4

Total Fixed cost = Maintenance cost ( + ) SLM Depreciation ( + ) Other fixed costs
192500 = 40000 ( + ) 87500 ( + ) Other fixed costs
Other fixed cost = 192500 ( - ) 40000 ( - ) 87500 = 65000
WN 4 - Maintenance cost

Maintenance cost 40,000.00

Inflation rate 5%

Particulars T1 T2 T3
Maintenance cost 42,000.00 44,100.00 46,305.00
Maintenance cost [ in '000 ] 42.00 44.10 46.31

WN 5 - Other fixed cost

Other fixed cost 65,000.00

Inflation rate 2%

Particulars T1 T2 T3
Other fixed cost 66,300.00 67,626.00 68,978.52
Other fixed cost [ in '000 ] 66.30 67.63 68.98

WN 6 - Tax saving on depreciation

Year Year 1 Year 2 Year 3

Opening Balance 400,000 300,000 225,000
Less: Tax Allowable Depreciation (100,000) (75,000) (56,250)
Closing Balance 300,000 225,000 168,750
Tax saving on depreciation [ Dep * Tax rate ] 30.00 22.50 16.88

Closing WDV 126,563

Sale proceeds 50,000
Loss on disposal 76,563
Tax saving on such loss 22.97
 terial required is rubber particles and these are
contractually guaranteed for the next four years.
mmediate termination penalty of 150000

anufacture these particles in house by using recycled tyres.

that at the end of year four the machine will have a second-hand value of $50,000.

epreciation charge

d as follows:

Year 4
160,000

ation on a 25% reducing balance basis

imed in the fourth year of operation when the machine is disposed of.

rchasing the equipment.

T3 T4 T5

455.00 560.00
-113.64 -144.07
-46.31 -48.62
 -68.98 -70.36
226.07 296.96
-53.97 -67.82 -89.09

22.50 16.88 35.63

50.00
194.60 296.01 -53.46
0.658 0.572 0.497
128.05 169.32 -26.57

T4
160,000
3.50
560,000
560

T4
160,000
0.90
144.07

ful Life = [ 400000 - 50000 ] / 4 = 87500

 T4
48,620.25
48.62

T4
70,358.09
70.36

Year 4
168,750
(42,188)
126,563
12.66