Comments

    • Avatar of johnmoffat says

      You look up 0.7 down the left hand side, and then 0.07 across the top.

      This should give you 0.2794.

      Then you apply the rule at the bottom of the tables.
      Here, because D1 is >0, you add 0.5 to the figure from the tables.
      so N(D1) = 0.5 + 0.2794 = 0.7794

      It is the same procedure for N(D2)

  1. avatar says

    Sir is Business valuation covered in the audio lectures . And if yes , please guide me where to find them . And secondly post acquisition change is share price and the premium calculations , please guide me where to find them in your audio lectures.
    Thank you.

  2. avatar says

    Dear All/Tutor,

    There is this ongoing issue with Fixed Costs, well not really ongoing but how BPP solved the problem below is bit confusing to me.

    BPP Practice and Revision Kit ( Mock Exam 2, Q1). It is an International Investment Appraisal question. One of the information said and i quote

    “Fixed Costs and local variable costs, which for the first year of operation are 12 million pesos and 600 pesos per unit respectively, are expected to increase by the previous year’s rate of inflation”.

    My interpretaion from the above means both costs are to increase ? so fixed costs will increase?

    BUT the answer only uses variable costs and ignored fixed costs.

    Please any explanation why this was the case or should I just state my own assumptions in the exam and work with that. I know.

    Feedback s are highly appreciated. I just need to pass this P4 this time

    Thanks

    • Avatar of johnmoffat says

      I do not have the BPP mock, but the reason will almost certainly be because fixed costs are only relevant if the total fixed costs increase as a result of doing the project. For profit purposes they may well absorb them over different projects, but for DCF we are only interested if the total fixed costs change.

  3. avatar says

    Please forum/Tutor, can someone help me with the correct treatment of tax allowable depreciation.

    In some solutions, it forms part of the cashflows before tax and after the tax is calculated, it is added back to the After tax cashflow.

    However in Some other answers, what is done is this. They calculate the capital allowance and get the tax effect on the allowance calculated and this is added to the cashflows after tax and if it is a balancing charge the effect is a deduction. So which is the correct treatment

    Many Thanks

  4. avatar says

    If the question said that the Fixed Overheads will grow from year one at a rate of 10%. What will be our charges to put into the NPV calculations?

    Will it be:
    i) yr 1= 20
    yr 2= 42
    yr3=66
    yr4=93
    yr5=122

    or will it be incremental changes

    ii) yr1 = 20
    yr2=22
    yr3=24
    yr4=27
    yr5=29

    Thanks.

    • Avatar of johnmoffat says

      If the fixed overheads are 20 in the first year and grow at 10% per year each year, then they will be 22 in the second year, and so on……..your answer (ii).

      I don’t know why you have called them incremental changes at all. There would be no logic whatsoever in your answer (i)
      (Just suppose you personally pay rent of 20 a year, and I tell you it will increase at 10% a year – it will not mean you pay 42 next year!!!!)

      Separately though, do remember that fixed overheads are only relevant at all if they are extra (incremental) fixed overheads as a result of doing the project. If they are going to be payable anyway then they are not relevant.

      • Avatar of johnmoffat says

        It really depends on assumptions, and whether or not you are told the value of the project at the end of the planning period. Sometimes the examiner has treated the value at the end as if they were sale proceeds (and therefore had a balancing charge/allowance), other times it has just been reducing balance for each year of the planning period. On at least one occasion the problem has been avoided by the question giving the after-tax value, which assumed it had dealt with all taxes.

        If it is not made clear then state your assumption and you will get the marks. In P4 there is rarely one correct answer – it depends often on assumptions made (not just with regard to tax).

      • avatar says

        I’m not getting you. I’m asking, if at the end of a project for e.g 6th year, after charging capital allowance that year, if there still remains some balance and no sale proceeds are given, so will we calculate any unrecovered allowance on it by multiplying with the tax rate?

      • Avatar of johnmoffat says

        The way capital allowances work is this:

        Every year it is a writing down allowance of 25% reducing balance except for the final year.
        In the final year, there is no writing down allowance. Instead you subtract any sale proceeds from the written down value and the difference is a balancing allowance or a balancing charge – that is the capital allowance in the final year.

  5. Avatar of emereole says

    Hi
    With regards this tutorial, why is it that no tax benefit is associated with the asset in the year it is disposed? I would have expected a tax benefit of 570 *0.25*0.25 (balance at end of year 4 x charge for year 5 x tax effect of charge for year 5). Please assist!

      • Avatar of johnmoffat says

        No – the only tax effect when a non-current asset is sold is the tax on the balancing charge or allowance (as is in the lecture).

        (Ignore this bit if it confuses, but the point is that you are allowed to get a total tax saving of 25% (the tax rate) of the total drop in value of the asset – in this case it drops in value by 800 (1800 cost less 1000 sale proceeds) and so the total tax saving will be 25% x 800 = 200. However, year by year you get the saving on a reducing balance basis, and then in the final year there is the balancing charge or allowance which makes the overall total tax saving equal to the 200. If you add up all the tax benefits over the years, then it does come to a total of 200 (subject to roundings))

      • Avatar of emereole says

        Thanks. I get this. What I don’t understand is why there was no capital allowance in the year of disposal. Is the disposal presumed to occur at the start of the year? If so should we not do away with revenues and costs in the year of disposal? The calculation of the balancing charge clearly assumes there is no capital allowance in the year of disposal and I want to understand why this assumption is made. I hope clarifies my question.

      • Avatar of johnmoffat says

        The rule for the capital allowance calculation is that it is 25% reducing year for every year except the final year. In the final year there is either a balancing allowance or a balancing charge depending on the amount of the sale proceeds. It has nothing to do with when the asset is sold during the year.
        (A balancing allowance is a capital allowance, a balancing charge is simply a negative allowance)

        (That is the rule, although in fact even if it was allowed to have 25% in the final year it would end up with the same result – all that would happen is that the balancing charge or allowance would change, but the net result would be exactly the same )

  6. Avatar of christopheryaheya says

    Hi Sir,

    Consider this. $US/Sterling
    Spot 1.9456-1.9210
    3 Months Forward 1.9066-1.9120
    1 year Forward 1.8901-1.8945

    Borrowing Investing
    Sterling up to 6 months 5.5% 4.2%
    Dollar up to 6 months 4.0% 2.0%

    We need to pay $1,150,000 in 5 months time, What will be the interest rate for borrow an equivalent pound now for.

      • Avatar of christopheryaheya says

        I actually mean the interest rate for borrowing pounds, The interest rate of 5.5% is for up to 6 months, Which according to the answer was 0.08333 which I don’t know how they got it.

      • Avatar of johnmoffat says

        Either you have misread the answer or there is a typing error.

        The interest rate for depositing dollars for 5 months is 5/12 x 2% which equals 0.833% (or 0.00833).
        The interest rate for borrowing pounds is 5/12 x 5.5% which is 2.29% (or 0.0229)

    • Avatar of johnmoffat says

      I guess you are clear as to how the real cash flows have been calculated – these are the cash flows ignoring inflation. (If you are not clear about any of them then do post again).

      The nominal cash flows are the actual cash flows – i.e. taking account of the inflation (which in the UK is 2.5% per annum.

      So…….the first cash flow is $52,000 in real terms, but this is received 2 years after the start of the project and so we need to add on 2 years inflation. 52,000 x (1.025^2) = 54,633
      Similarly, the second cash flow is 490,000 in real terms, but is received at time 3 and so we need three years inflation at 2.5% per annum. 490,000 x (1.025^3) = 527676

      And so on :-)

Leave a Reply