§ Mr. Higgins
asked the President of the Board of Trade if he will give examples showing the effect which the latest change in investment allowances will have on the rate of return on £100 capi- 103W tal invested in a specimen project or projects on a discounted cash flow basis and on a simple rate of return basis, respectively, on the assumption that the cash flow is £15 per annum.
§ Mr. Jay
The following tables show the effect on the rate of return, after tax and depreciation, of the temporary higher rates of investment grants, compared with the normal rates, in respect of £100 qualifying investment, where the gross profit arising from the investment, before tax and depreciation, is £15 per annum.
Simple Rate of Return Basis per cent Discounted Cash Value of Return Basis (discounted at 7 per cent p.a.) per cent National Normal 20 per cent grant 8.4 8.5 Temporary 25 per cent grant 9.0 9.5 Increase 0.6 1.0 Development Areas Normal 40 per cent grant 10.8 12.5 Temporary 45 per cent grant 11.4 13.5 Increase 0.6 1.0
Notes on the Tables:
1. It is assumed that the investment of £100 is made by an established company in Great Britain in new machinery or plant which is eligible for investment grant, that its profits are subject to Corporation Tax at 40 per cent, and that full advantage can be taken of tax allowances at the earliest permissible date. The grant, and the first savings from annual tax allowances, are treated as received 18 months after the expenditure.
2. The plant is assumed to be retained for ten years and then scrapped; and annual allowances for tax purposes, calculated on the reducing balance basis, are 15 per cent. The calculation of the "simple rate of return" assumes that the plant is written off over its life, and relates the average annual return (after tax) to the average capital employed over the period of the investment. The general method employed to arrive at the calculation of "discounted cash value of return" follows closely on that adopted in the National Economic Development Council publication "Investment Appraisal".