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Sir, I have a few questions related to Q1 (Your business) in the June 09 exam.
A) The Capex is adjusted for tax. –
We dont usually charge tax on the capital expenditure, right? So shoudn’t I add back the tax charged on the capex?B) The proceeds of the sale of the capital asset are expected to be $7m, which has been included in the forecast of the project’s post tax cash flows. –
We are supposed to consider the tax benefit/ charge upon the disposal. The benefit sums up to $3.68m. So this should be added (and it has been added). However, shouldn’t the $7m figure be deducted from the NPV calculation, as it was incorrectly included in it?Please help me with the above. Many thanks! 😀
Also sir, in part b of the same question, we’re asked to compute the duration of the project, which is computed differently to the way we compute Macaulay’s duration. The answer, however is the same using both methods.
I wanted to know if this is the case always (wherein answer under duration method = answer under Macaulay’s method) or if this was a stray coincidence. Also, should I follow the method used here in the answer if the duration is asked for, and use Macaulay’s duration only if the question specifically asks us to compute the duration using Macaulay’s method.Thanks once again 🙂
Question 1:
The question says that the cash flows include the estimated tax benefit from capital allowances, and so you do not need to add them back again.
The projects sale proceeds are a cash receipt and so should certainly be included whatever happens. Any tax effect is a separate issue.
Thank you sir. 🙂
And oops. I do know that we include the scrap value of the asset at the end of it’s useful life. Guess I was overthinking! Really stupid of me for having asked that. Sorry about that silly question. 🙁
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