Plant or machinery leased with other assets:
Plant or machinery may be leased with other assets. For example a production line may be leased with the buildings which house it. Or a car may be leased with a photocopier.
For the long funding lease rules to work as intended, and treat longer periods of financing of plant or machinery as just that, it is necessary to separate such leases into two or more leases and apply the long funding lease rules to each deemed lease.
In broad terms, where plant or machinery is leased with other assets, the plant or machinery is treated as if it were the subject of a separate notional lease. Where different types of plant or machinery are leased under the same lease they too are treated as if they are subject to separate notional leases. The tests for a long funding lease, and the rules for taxing them, are then applied to each notional lease of plant or machinery.
Background plant or machinery is the sort of plant or machinery that might be found in many types of building and performs a ‘background’ function. It includes plant or machinery such as lifts and central heating.
Which finance facility is best for us?
What method of finance shall I use?
When businesses calculate the cost of different sources of finance used, a logical relationship should emerge between the cost of the different sources of finance and the risks involved. This article discusses the implications and variations to determine the correct finance facility upon purchasing assets.
This method of determining ones options of finance is akin to a balance sheet whereby it is a snap shot in time of a company’s overall worth and will vary given many factors.
The calculations below are for indicative purposes only. Current tax rates and capital allowance rates vary and should not be used to alone to determine investment decisions.
XYZ Plc, a coach operator have traded for 125 years. The company are purchasing a new coach to the value of £160,000; before the Finance Director makes a decision on the investment method the company may wish to calculate the NPV (Net Present Value)
(A net present value (NPV) includes all cash flows including initial cash flows such as the cost of purchasing an asset, whereas a present value does not.-we will endeavour to discuss and post full calculations in another article including WACC (weighted average cost of capital and the implications)).
Factors that will influence the investment decision for XYZ plc
1. Asset cost (exc VAT): £160,000.00
2. Tax rate: 30% (now 28%-see Fig 1)
3. Capital allowance rate: 25%
4. Months to year end: 6 remaining
5. Opportunity cost of funds: 8.00%
6. Depreciation rate: 6.67% per annum
7. Asset kept for: 180 months
A synopsis of the net present cost, (please see explanation above) after tax over 180 months.
Most beneficial Consideration
Description Net Present Value
Hire Purchase 10 yrs 118102.65
Hire purchase 7 yrs 119706.41
Operating Lease 7 yrs 124458.72
Finance Lease 7 yrs 125634.50
Operating Lease 5 yrs 129528.88
The option with the lowest NPV should be considered the most economical, in this case XYZ plc should consider a Hire Purchase facility over a 10 year period, although many other factors will influence this decision.
*The discount rate is 5.71%
Compounding and discounting
Compounding is the way to determine the future value of a sum of money invested now, for e.g. in a bank account, where interest is left in the account after it has been paid. Since interest received is left in the account, interest is earned on interest in future years; the future value depends on the rate of interest paid, the initial sum invested and the number of years the sum is invested for.
Discounting is the opposite of compounding, compounding takes us forward discounting takes up backwards from the future value of a cash flow to its present value.