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Sir in blipton Co. by subtracting capital allowance from taxable profit and then adding it after tax we are getting 8.52m as P.V of investment phase and 13.5m as P.V of return phase and the NPV is 4.98m but if the capital allowance of blipton Co. is calculated by just adding tax relief after tax(Examiners technique) then P.V of investment phase is 6.2m and Return phase is 13m which will gave an NPV of 6.8m.
You mentioned that although both techniques will give u same answer but in some questions answer may vary, So can u tell me that the variation in these two NPVs 6.8m-4.98m=1.82m is ok and my answer is also correct or this difference of 1.82m is very high and I have not attempted this answer correctly.
And also tell me about the property value in this question the increase of 8% in property prices is in real term so should I inflate this 8% by 2.5% UK inflation rate to make it nominal?
In terms of calculating the NPV, then both approaches do give the same answer.
However this question is asking for the investment and return phases separately (because of the requirement to calculate the modified IRR), For this, the tax saving on CA’s is part of the investment phase, and the tax on the profits before CA’s is part of the return phase.
With regard to the property value:
First, because the value is increasing at 8% in real terms (i.e. ignoring general inflation), the actual rate of increase will be higher. It will increase by 10.7% p.a. ((1.08 x 1.025) – 1)Secondly, because note 1 of the question says that construction costs are paid at the end of the year, there is will only be 5 years inflation at 10.7%
Finally, note 3 in the question says that there is a charge for repairs and renewals payable on disposal of 1.2M quoted at current prices.
So…the net amount is (6.2M x 1.107^5) – (1.2M x 1.025^6)
which is 10306941 – 1391632 = 8915309 (as per the examiners answer)
A horrible exam question, but it was set by a previous examiner – not the current examiner 🙂
And one more thing sir the priveous
examiner you’re talking is professor Bob Ryan?
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