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Hello sir,
“The board want to allocate indirect activity-based costs, using the usual cost apportionment methods, of $100m per year for each of the 5-year life of the project”
Can I know why this cost does not included in calculating base case NPV?
This is not specific to APV but to any DCF appraisal question.
“Allocating costs using the usual apportionment methods’ means that they are taking the total existing fixed costs (which they then apportion or share between different projects) and sharing some of the existing total to this particular project.
It does not mean that the total cost will change – it will remain the same in total for the company – and therefore there is no extra cash flow involved for the company. It is therefore irrelevant for the DCF decision.
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