Q. Find Capital allowances and associated tax benefits?

It is suitable to use the after-tax cost of borrowing as the discount rate since Doe Ltd is clearly in a tax-paying situation and therefore is in a position to claim the tax benefits of lease payments and capital allowances.

Care should be taken when determining the timing of cash flows since financial evaluation models seek to represent the real world. As lease payments are done on the first day of Doe Ltd's accounting period it is appropriate to treat them for discounting purposes as though they occur at the end of the previous accounting period. But the tax benefits of lease payments will occur in the accounting period following that in which payment is made.

Likewise it is appropriate to treat the purchase cost on 1 January of the first year of use as being made at year 0 for discounting purposes even though the tax benefit from the first capital allowance will arise in year 2 that is in the accounting period following the one in which payment is made.

Capital allowances and associated tax benefits:

valuation of borrowing to buy:

The cost of borrowing to buy is $281291.

valuation of leasing

The cost of leasing is $250089