Volo Ltd has recently purchased 2 machines at $50 000 each.Each machine has a useful life of 5 years,and will be fully depreciated at the end of their useful lives.The government provides an investment allowance of 15 per cent.The tax rate is 30 per cent.The net cash flow impact of the investment allowance is:

Question

Quizplus · Accepted Answer

The investment allowance reduces the cost of the machines for tax purposes, which in turn reduces the amount of depreciation that can be claimed. This means that the taxable profit is higher, and the tax payable is also higher. The net cash flow impact of the investment allowance is therefore negative. The amount of the negative impact is calculated as follows:Investment allowance = 15% x $50,000 x 2 = $15,000Tax payable on investment allowance = $15,000 x 30% = $4,500Net cash flow impact = -$4,500

Volo Ltd Has Recently Purchased 2 Machines at $50 000