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yes i got the same question and it was my first section A question . i studied and revied cost of capital so so many times and was so confident regarding this part of the syllabus. i remember calculating risk adjusted cost of equity using Beta asset 3 to 4 times and none of my answers matched the options. and from then and there i was confused .
My exam was a disaster. I felt like i did not study anything.
Had a question asked to calculate tax rate at which npv is 0
I ended up calculating irr bevause i dint know how to calculate sensitivity for tax rate. Let me know if someone got the similar question?
Alot of theoretical mcqs.
Everything was from risk management and working capital. Tricky questions.
Too much theory marks for section Cthank you so much sir. i did not think that examiner can ask in this way too but now i understood thanks a lot.
i have one more question regarding this mcq and it is that, can the answer to lease vs buy scenario be +NPV which would mean that we will choose the higher benefit (instead when the NPV is negative it means we choose the lowest cost option).
in this mcq above, how do we know that +NPV is benefit or cost?
i hope you understood my questionthis mcq was taken from bpp revision kit and i did look for the answer but in the explanation i did not understand how the answer was 6.11.
i will check on the lecture that you mentionedA lease versus buy evaluation has been performed. The management accountant performed the calculation by taking the saved initial outlay and deducting the tax-adjusted lease payments and the lost capital allowances. The accountant discounted the net cash flows at the post-tax cost of borrowing. The resultant net present value (NPV) was positive.
Assuming the calculation is free from arithmetical errors, what would the conclusion for this decision be?
Lease is better than buy
Buy is better than lease
A further calculation is needed
The discount rate was wrong so a conclusion cannot be drawnaccording to the exam kit the correct answer is lease is better. but i have a doubt because the question says initial outlay, which means initial investment if i am not wrong, in calculation of NPV for financial or operating lease we donot consider initial investment right?. so how come lease is better option is correct and not buy is better than lease?
also can you explain how the other two options are incoreectalso in question it is said that “all lease rentals are can be assumed to be allowable for tax purposes in full in the year of payment”
why is it still that we placed values of tax saving on rentals in arrears for operating lease?sir i did not understand how pre tax revenue is calculated and what is the logic. can you explain it again ? sorry for the trouble.
i will go through above mcqs once again.
another mcq that I have an issue in. in this question i did not understand how , what and why we did the pre tax calculation at the end of the answer.
Q: Juicy Co is considering investing in a new industrial juicer for use on a new contract. It will cost $150,000 and will last 2 years. Juicy Co pays corporation tax at 30% (as the cash flows occur) and, due to the health benefits of juicing, the machine attracts 100% tax-allowable depreciation immediately. Given a cost of capital of 10%, what is the minimum value of the pre-tax contract revenue receivable in two years which would be required to recover the net cost of the juicer
Q: a lease agreement has an NPV (26,496) at a rate of 8%. lease involves immediate down payment of 10,000 followed by 4 equal annual payments.
what is the amount of annual payment?thank you sir. i was just asking for the purpose of section C question as every seperate working has seperate marks, did not know what examiner expects.
what resources you used for studying both papers and please give some tips regarding method of studying
