Tax Allowances – NBC Institute

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

Question

Tinco Limited (TL) is considering an expansion project. The project will involve the acquisition of an automated production machine costing ₦11,000,000 and payable now. The machine is expected to have a disposal value at the end of 5 years, which is equal to 10% of the initial expenditure.

The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the project’s five-year life:

Level of Demand	₦’000	Probability
High	16,000	0.25
Medium	12,000	0.50
Low	8,000	0.25

It is expected that the contribution to sales ratio will be 50%. Additional expenditure on fixed overheads is expected to be ₦1,800,000 per annum. TL incurs a 20% tax rate on corporate profits. Corporate tax is paid one year in arrears.

TL’s after-tax nominal (money) discount rate is 15.5% per annum. A uniform inflation rate of 5% per annum will apply to all costs and revenues during the life of the project. All of the values above have been expressed in terms of current prices.

You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.

Required:

a.
i. Evaluate the proposed expansion from a financial perspective. (10 Marks)
ii. Calculate and interpret the sensitivity of the project to changes in:

The expected annual contribution (3 Marks)
The tax rate (2 Marks)

b.
You have now been advised that the capital cost of the expansion will qualify for written down allowances at the rate of 25% per annum on a reducing balance basis. Also, at the end of the project’s life, a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.

You are required to calculate the financial impact of these allowances. (5 Marks)

Answer

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Tags: Capital Budgeting, Discount rate, NPV, Sensitivity Analysis, Tax Allowances
Level: Level 3

Topic: Investment Appraisal Techniques

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

Question

Omoge Nigeria PLC has the following share options scheme for its directors as of May 31, 2021:

The price of the company’s shares as of:

May 31, 2021: ₦8 per share
May 31, 2020: ₦8.50 per share

Key details:

Directors must be working for Omoge Nigeria PLC on the vesting dates for the options to vest.
No directors have left the company since the share options were issued, and none are expected to leave before June 2023.
The options can be exercised on the first day of the month in which they vest.
In accordance with IFRS 2, an expense of ₦600,000 was charged to profit in the year ended May 31, 2020, and the cumulative expense for the two years ended May 31, 2021, is ₦2,200,000.
Tax allowances arise when the options are exercised and are based on the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.

Required:

Evaluate the deferred tax implications of the share options for the year ended May 31, 2020, and May 31, 2021. (10 Marks)

Answer

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Tags: Deferred Tax, IAS 12, IFRS 2, Share Options, Tax Allowances
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

Question

Under what condition should Research and Development (R&D) Expenditure be capitalized?

Answer

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Tags: Capitalization, R&D Expenditure, Tax Allowances, Tax deductions
Level: Level 3

Topic: Mergers, amalgamation, and reorganization
Series: NOV 2018

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

Question

The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the project’s five-year life:

Level of Demand	₦’000	Probability
High	16,000	0.25
Medium	12,000	0.50
Low	8,000	0.25

You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.

Required:

a.
i. Evaluate the proposed expansion from a financial perspective. (10 Marks)
ii. Calculate and interpret the sensitivity of the project to changes in:

The expected annual contribution (3 Marks)
The tax rate (2 Marks)

You are required to calculate the financial impact of these allowances. (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discount rate, NPV, Sensitivity Analysis, Tax Allowances
Level: Level 3

Topic: Investment Appraisal Techniques

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

Question

Omoge Nigeria PLC has the following share options scheme for its directors as of May 31, 2021:

The price of the company’s shares as of:

May 31, 2021: ₦8 per share
May 31, 2020: ₦8.50 per share

Key details:

Directors must be working for Omoge Nigeria PLC on the vesting dates for the options to vest.
No directors have left the company since the share options were issued, and none are expected to leave before June 2023.
The options can be exercised on the first day of the month in which they vest.
In accordance with IFRS 2, an expense of ₦600,000 was charged to profit in the year ended May 31, 2020, and the cumulative expense for the two years ended May 31, 2021, is ₦2,200,000.
Tax allowances arise when the options are exercised and are based on the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.

Required:

Evaluate the deferred tax implications of the share options for the year ended May 31, 2020, and May 31, 2021. (10 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Deferred Tax, IAS 12, IFRS 2, Share Options, Tax Allowances
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

Question

Under what condition should Research and Development (R&D) Expenditure be capitalized?

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capitalization, R&D Expenditure, Tax Allowances, Tax deductions
Level: Level 3

Topic: Mergers, amalgamation, and reorganization
Series: NOV 2018

Question Tag: Tax Allowances

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FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

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FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

You're reporting an error for "FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques"

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

You're reporting an error for "CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)"

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

You're reporting an error for "AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation"

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

You're reporting an error for "FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques"

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

You're reporting an error for "CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)"

AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation

Conditions under which research and development expenditure should be capitalized for tax purposes.

You're reporting an error for "AT – Nov 2018 – L3 – Q3d – Mergers, amalgamation and reorganisation"

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