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1. in the first part it is said that production is ceased immediately so we calculate the profit and adjust it in APV. but if we have to choose between early closure and over the four period what we need to do is calculate NPV of four years and deduct 2.3 million from it as the closure cost is equal to the proceeds from sale of asset. cost of capital we take will be 7% as mentioned in the question for us cash flows separately.
y1 40000*20*.935=748000
y2 32000*20*.873=558720
y3 25600*20*.816=417792
y4 20480*20*.763=312524
total 2037036-2300000=262964 loss2. in part c its explains the portfolio theory
they said that risk will be diversified if operations are moved to gamala. how ??as company will have same operations as that of USA.
1. When I read the question when it was first released in 2013, I wanted to do the same as what you are suggesting (which wouldn’t actually have lost any marks assuming I had done everything else correctly, because it is the individual workings that get the marks, but it would obviously have taken a little longer). However, it is the way the examiner has interpreted the paragraph that says that the financial impact of the gradual closure would be cost neutral. He has taken that to mean that the overall cost would be the same whether they closed immediately or closed gradually.
2. Given that shareholders are already well-diversified then the risk of the new project would be irrelevant were it in the same country. However because this is investing a different country then they might get the benefit of international diversification which is where the overall markets in two countries have different risks (where they are not perfectly correlated with each other). It is less likely these days in developed markets (e.g. the stock market in the US tends to go up and down in a similar way to the stock markets in Japan), but could still be beneficial if investing in less developed markets.
there is one more question regarding calculation of tax in working 5(they didn’t add back the depreciation)
if we calculate Capital allowance separately it would be 20000*.2=4000 per annum
so each year calculation would be
y1 -2201 as there is already negative so we can not claim allowance.
y2 20,007-2201=17806*.2=3561 so we can claim allowance upto that amount
y3 80664*.2=16132-4000=12132 is tax payable in that year.
y4 114310*.2=22862-4000=18862 is tax payable in that year.
ur response will be appreciated.
As per normal tax rules from Paper TX (was F6), capital allowances reduce the taxable profit or where there is a loss they increase the loss.
It is the tax loss (after capital allowances) that is carried forward to reduce future taxable profits.
In what you have typed you have not had the benefit of the capital allowances in the first two years, but that is not what happens – you do get the benefit because the loss for tax purposes is higher.as per tax rule and as per your lectures this working 5 is okay. but don’t we need to add back depreciation after tax? i saw f9 lectures on TAD working again and if we are doing the way BPP is doing we need to add back TAD. as they do in question 58 Yilandwe.
You only need to add back depreciation if depreciation has been subtracted in the cash flow statement in order to arrive at the taxable profit.
When the tax has been calculated separately as in this case, depreciation has not been subtracted in the cash flows and therefore there is nothing to add back.
In addition, as I explain in my free lectures, the current examiner always assumes that an amount equal to the depreciation is needed to be spent on the maintaining of the assets. On this assumption we would not add anything back anyway.
thank you so much sir now i am crystal clear on it.. much appreciated.. your second point is what i was missing in my concepts..now i locked them. 🙂
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