[rams1900]

Thanks for your reply. I am fully satisfied with respect to my 1st question. with respect to my second question. I agree it is not ‘free’ loan. since interest has to paid. I like to rephrase my second question.

how will the calculation change and therefore the investment decision change, if the loan has to be repaid in 4 years from the loan doesn’t have to repaid at all. surely the 270 million GR affect our investment decision in this case. it is more like government grant.

[rams1900]

Hi.

I have 2 questions.

1) why is the PV of tax shield and subsidy not done in Gamala and then converted to current spot rate of 55. but it is done for 4 years, converted each year to dollar, then discounted.

that is..(first method)

tax shield = 270*0.06*0.2*3.546 =11.489 ( i have used 5% for 4 years annuity as 3.546)
tax subsidy = 270*.07*.8*3.546 = 53.615

Total = 11.489+53.615 = 65.104
convert to $ = 65.104/55 = 1.184 million $

but text book answer with other method is 1.033 million $

(the difference is marginal though)

can you tell me why 2nd method is used over 1st method. and also when do we use 1st and when do we use 2nd method. for the apv + international problems

the second question…

2) The question mentions the loan need not be repaid if 4 years operation happens. assuming it does, what is the effect of giving free loan? the initial investment will be zero. since we are not spending any money out of pocket as investments. and we wont have to pay in future.

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