Chp7: Taxation

Question 1

Formula for Taxable Income?

Answer 1

TI= Income - Expenses- Depreciation Charge - Allowances

or

TI= NCF before Tax - Depreciation

Question 2

What are Capital Gains and Capital Gains Tax?

Answer 2

• Capital Gain
If net realised value of asset at disposal is greater than the then book value of asset. Capital Gain = Net realised value – Book Value

• Capital Gains Tax (CGT) Levied as a specified
percentage on capital gain, payable in the year of sale.

Question 3

Elaborate what is Investment Tax Credit (ITC)?

Answer 3

E,P,T,O,IC
• Tax incentive to encourage investment.
• ITC is a percentage of initial investment.
• Granted as a tax credit
- deductible from the normal tax payable
• Timing of the tax credit (decided by state).
• Immediately on investment (year 0) or
• Year after investment (year 1)
• The organisation must be paying income tax more than the tax credit it intends to take.
• ITC improves early CFs and hence enhances project’s
economic viability.

Question 4

Explain income tax?

Answer 4

• Tax on excess income and expenditure (example: on profit).

- Revenue items only considered

Question 5

Regarding calcs what are the 6 columns

Answer 5

1) Year
2) Net CF before tax
3) Depreciation
4) TI (Net CF before tax- Depreciation)
5) Tax (-ve fraction of TI)
6) Net CF after-tax (Net CF before tax -Tax)
^ Salvage value is added here (salvage cant depreciate)
Do NPV