Cash Purchase V’s Finance Agreement
A profitable business looked to purchase a piece of equipment. The business explored the most cost effective and tax efficient method of payment.
| Cash Purchase | £6,500.00 |
| Interest lost from using money from bank @ 5% Year 1 – £325.00 / Year 2 – £341.25 / Year 3 – £358.31 |
|
| Total Interest Lost | £1024.56 |
| Writing down allowance @ 25% Year 1 – £650.00 / Year 2 – £487.50 / Year 3 – £356.63 |
|
| Total Tax Allowance | £1,494.13 |
| Total Cost | £6,500.00 |
| Minus Tax Allowances | £1,494.13 |
| Plus Lost Interest | £1,024.56 |
| Total Cost of Paying Cash | £6,030.43 |
| 3 Year Finance | £6,500.00 |
| £6,500.00 finance (10% Deposit then 36 x £201.35) | |
| Interest gained from money in bank @ 5% Year 1 – £325.00 / Year 2 – £341.24 / Year 3 – £358.31 |
|
| Total Interest gained | £1,024.56 |
| Finance Agreement = 100% Tax Deductible (Total Repayments = £7,898.60) |
|
| Minus Tax Allowances at 40% | £3,159.44 |
| Total Tax Allowance | £3,159.44 |
| Total Repayments | £7,898.60 |
| Minus Tax Allowance | £3,159.44 |
| Minus Interest Gained on Capital | £1,024.56 |
| Total Cost on Finance Agreement | £3,714.60 |
WINNER = FINANCE AGREEMENT = SAVING: £2,315.83
*This is an example only. Figures will differ dependent on business situations and different factors.
