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- July 1, 2021 at 10:12 am #626785
Hi,
I’m doing the question case 160 Pinks Co in the Kit BPP 2021 and I have a question relating to the real net present value of Pinks Co’s investment project.
Everything is ok with the nominal net present value but when I calculate the real net present value, I saw that in the BPP’s answer, the real net cash flow was calculated by using the nominal cash flow after tax then deflated by inflation rate and then discounted by the real after-tax cost of capital.
However, my teacher calculated the real net present value by using the nominal taxable cashflow and then he deflated by the inflation to get the real taxable cashflow. From that, he calculated the tax payment by multiply the real taxable cashflow with tax rate of 26%, the tax benefit was kept the same as under the calculation of nominal cashflow as he said that tax benefit is not affected by inflation rate.
I wonder that whether my teacher is right or the BPP ‘s answer is correct since I think the difference between the two solution is that the tax benefit is whether affected by inflation or notJuly 1, 2021 at 4:19 pm #626806Your teacher is right, and that is what the examiner’s own answer does. However the examiner made it clear that either approach would get full marks.
(To be honest it was a bit of a silly question for the examiner to ask because nobody would do both parts (i) and (ii) in real life 🙂 )
July 2, 2021 at 4:13 am #626818Thank you so much 🙂
July 2, 2021 at 7:42 am #626833You are welcome 🙂
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