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Dear Tutor,
The company will generate income of 600$ each year. By looking at the answer the income is not inflated. Would it be acceptable to inflate the income by the inflation rates given in the question?
No – it would be wrong because the government is offering 600M in each of the next 3 years. There is no mention of them offering to inflate the amount.
(However the mistake would not lose you many marks and if you did everything else correctly you would still easily pass the question. But it does highlight the importance of making sure that you workings are easy for the marker to follow – so they can still check that you are doing everything else correctly and give you the marks for everything else 🙂 )
for the NPV working, why do we have to separate the realisable value of 7500 to 5000 and 2500 and discounted factor the 5000 at the spot rate in year 3 ?
and can you also please explain this “As a result of the exchange rates on the initial fee being fixed at the year 0 spot rate, Buryecs Co has gained $5,000
million x (0·1430 – 0·1315) x 0·675 = €39 million”thank you
The question says that the swap of the principal (5,000) will be at today’s spot rate – both now, and in three years time.
Had this not been in the agreement, then in three years time it would have been at the spot rate in 3 years time, which would have been only 0.1315 instead of at todays spot rate of 0.1430.
Hi John,
Small question regarding the bank charge in Buryecs when considering the NPV of the project.
Why is the bank charge not considered as an annual outflow each year on the swap balance ($5000m)?
I understand the book value of the swap in EUR would change on this balance year on year but I’m not certain why it isn’t included within the project appraisal
i,e for year 1 I calculate at ($5000m * 0.5) = $2500m, $2500 * 0.6 = $1500 and then $1500 conversion into EURs i.e. in Year 1 would be an outflow of $1500*0.142 = 213 EUR outflow in year 1
Thanks in advance
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