Most of the countries in the world allow depreciation over the fixed asset in tax regime. This is called Capital Allowances and is a saving from paying more tax to the tax authorities. Capital allowances can be claimed for properties, cars, machinery and fixtures etc. But for the purpose of NPV (Net Present Value) calculation, we will not take accounting depreciation. Instead, we will focus on depreciation rates as prescribed in tax regime.
Example
ABC is considering investing in a machinery costing $ 50,000. The machine has approved capital allowance of 20 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} per annum on reducing balance method. The useful life of the asset is 04 years. Corporation tax rate is 30 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}. Prepare the schedule for capital allowances and related tax savings.
Solution
| Year | Asset Value | Capital Allowance | Tax Shield/ Saving |
| 1 | 50,000 | 10,000 | 3,000 |
| 2 | 40,000 | 8,000 | 2,400 |
| 3 | 32,000 | 6,400 | 1,920 |
| 4 | 25,600 | 5,120 | 1,536 |
| Total | 29,520 | 8,856 |