[naveed42927]

Dear sir,

Thank you very much for your clarification. I assume that incremental cost is not relevant there. I think we should only be looking from asset perspective i.e., fair value less cost to sell (cost can be incremental, non-incremental or whatever). All the costs are relevant, right?

[naveed42927]

Dear sir,

I have successfully passed my AFM exam. I passed it at 50.
However, I need your suggestions regarding time management in ACCA advance exams. Your precious suggestions will help me in future exams.
The biggest problem that I faced was understanding question scenarios. These are too lengthy scenarios. Even getting their point is very time consuming.

Thank you for helping us in passing ACCA exams.

[naveed42927]

Thank you for answering my query.

However, they have not mentioned anywhere in the question that this 35m is price of the option or will be incurred if the project is delayed. Also, while I was checking the solution to the question, they have mentioned in the brackets like:

NPV if the project is undertaken immediately;
Net Present Value = $47.73 million – $35 million = $12.73 million
(or $0.73 million after taking account of the initial $12 million investment).

Similarly when the option was utilized
the option value = = 28.63 – 14.95 = $13.68 million (positive value)

They also mentions again about this 12m like:

By taking account of the option to delay the project, the value of the project
increases to $13.68 million (or $1.68 million after bringing in the unavoidable
$12 million initial investment).

I need to know about the statements mentioned in the brackets.
Including 35m only would have been the case if it was related to delay. However they have not specified that this 35m will only be incurred if there is delay.

Thanks for your help.

[naveed42927]

Thank you very much for your kind support. Yes, I did watch your lectures. They have helped me a lot in preparing for AFM syllabus. May God bless you. Actually, there was a bit confusion
which you have now cleared to me. Thanks.

[naveed42927]

Dear sir, thank you for your response. I have checked but I am still not getting the point. The interest rate parity formula is Fo = So (1+ic)/(1+ib). I want to know that why they are dividing interest rate by 3?
The question also mentions that after previous part that:
Alternatively, with the second derivative product Lignum Co can purchase either Euro call
or put options from Medes Bank at an exercise price equivalent to the current spot
exchange rate of ZP142 per €1. The option premiums offered are: ZP7 per €1 for the call
option or ZP5 per €1 for the put option.
The premium cost is payable in full at the commencement of the option contract. Lignum
Co can borrow money at the base rate plus 150 basis points and invest money at the base
rate minus 100 basis points in France.
Using OTC options
Purchase call options to cover for the ZP rate depreciating
Gross income from option = ZP140,000,000/142 = €985,915
Cost
€985,915 × ZP7 = ZP6,901,405
In € = ZP6,901,405/142 = €48,601
€48,601 × (1 + 0.037/3) = €49,200
(Use borrowing rate on the assumption that extra funds to pay costs need to
borrowed initially; investing rate can be used if that is the stated preference)

They have again divided the interest rate by 3. I want to know the reason. Thanks for your support.

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