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Hi John, thanks a lot for your fair explanation and extremely quick response!
Your comments perfectly answer all my questions, far exceeding my expectation 🙂
Dear Sir,
I would like to add 3 further questions. Neptune is quite different from rest of the APV questions I have practiced so far, probably due to the lagging tax effect (payable one year in arrears). This really confuses me.
4. This is again another question about capital allowance. Let’s look at 20X9 for example, profit before capital allowance is $122mil. Normally, one will then deduct depreciation/capital allowance to arrive at the taxable profit (of course add it back after tax calculation to reflect the real cash flow). In this case, the WDA is $160mil, which means the total taxable profit is now a loss ($38mil)! In other words, Neptune in theory should pay zero tax in this year.
Pilot Paper Tramont stated very clearly tax treatment methods in the event of loss, but what are the assumptions behind this question?
5. In the question, it is said “The new issue will incur transaction cost of 2% of the issue value at the time of issue”. I presumed it means 2% issue cost, but the model answer suggests the total loan value needs to be increased by 2%, and annual interest shield should be 800x(100/98)x7.2%x30%. This is a very different treatment from other questions, where consistently they use the original loan amount (not issue cost inflated) to calculate tax shield. Please explain.
6. The tax credit/charge will be received/paid one year in arrears. When comes to calculation of tax shield, shouldn’t the right time value adjustment be (annuity @ 7.2% for 6 years – discount factor @ 7.2% at Year 1), instead of annuity for 5 years?
Thanks again for your help!