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Sir i have a few questions related to this question
1) for capital allowances for red bal method wont we first substract the residual value from cost and then apply the reducing balance % of 50,25 etc, and how have tthey calculated the balance for forth year, pls explain
2) to find the cost of equity why have they assumed the beta of debt =0 when clearly they have metnioned that they have a debt trading at $94m?
3) also can u pls tell me in general what rates do we use to discount the cash flows for base case NPV and to discount the present value of tax saving on interest?
thanks in advance
1. In the year that the asset is sold, there is a balancing allowance/charge of the difference between the sale proceeds and the tax written down value.
Here, the tax written down value after 3 years is 4.5M, the proceeds are 4M, and so there is a balancing allowance of 0.5M.2. When using the asset beta formula in the exam, we always assume a debt beta of zero.
3. If the question requires the APV, then for the base case NPV we discount at the ungeared cost of equity (i.e. the cost of equity if there was no gearing). The tax saving on the interest is discounted at either the return on debt or at the risk free rate – there are arguments for both, and the examiner always accepts either (even though obviously the final answer is different). The examiner does say this in his own answer.
I do suggest that you watch my free lectures because all of the above is explained in full in my lectures (and, if necessary, for the first two questions the relevant Paper F9 lectures as well because they are revision of F9).
thanku sir for ur reply but im still confused about why have they not substracted the residual value from cost before finding the depreciation?
also sir I would like to askk that are the acca online webinar for p4 sufficient for covering all the topics if I dont read the book?
thanks in advance
The residual value is never subtracted from the cost to get the tax allowable depreciation (it is not the same thing as the financial accounting depreciation). It is always calculated on the original cost. Again – it really would be worthwhile you watching the paper f9 lectures on relevant cash flows for investment appraisal, because I go through the tax rules in full.
I don’t know what you mean by the acca online webinar. if you are meaning our free lectures on this website, then they are sufficient provided that you are already confident about paper F9 and provided, as always, that you have a Revision Kit from one of the acca approved publishers and work through all of the questions.
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