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1. In JUN 09, INVESTMENT PROJECT REVIEW, the question state that
“all the capital investment is eligible for a first year allowance for tax purposes of 50% followed by tax allowable depreciation of 25% per annum on a reducing balance basis”Doesn’t this mean that only year 1 is applied, However in the question, I’m not sure why year 0 is also allowed for 50% when the question says only year 1.
2. For NPV calculation, why do we include the initial cost when NPV only considers future and incremental cost ? initial cost do not satisfy any of those 2 criteria(future or incremental).
3. When we calculate APV of the project, why do we actually calculate issue cost for debt and equity ? Textbook simply tells us to calculate both equity and debt issue cost but I’m not sure why we have to calculate both for financing impact…
1. There is no such things as year 0. Time 0 is a point in time, which is ‘now’ and is the start of the first year.
Time 1 is a point in time that is 1 year from now – the end of the first year and start of the second year. And so on.I really do suggest that you watch the free Paper F9 lectures on investment appraisal, because this is fundamental to the whole concept of discounting.
2. Of course the initial cost is a future cost. We have not yet spent it (if we had already invested then there would be not point in appraising – it would be too late!!
3. The issue costs are extra costs involved if we do go ahead and raise the finance in order to invest in the project. If we don’t do the project then we won’t raise the finance and won’t have the costs.
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