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Hello John,
Grateful if you could explain the implications of below statement. Its part of the Tramont Co question in the BPP revision kit:
It is expected that the financial impact of the gradual closure over the four years will be cost neutral (the revenue from sale of assets will equal the closure costs). If production is stopped immediately, the excess assets would be sold for $2.3 million and the costs of closure, including redundancy costs of excess labour, would be $1.7
million.Thank you for your help.
Kind regards
If they cease now then they receive 2.3M and pay 1.7M, and these are accounted for in calculating the APV for the new operation.
If they do not cease now then they would close gradually and there would be no net revenue or cost from closure – so this does not need taking into account in the cash flows.
Thanks John
Could you please clarify why the net benefit of closing now (2.3-1.7) is added back?
Also if the gradual closure of the US plant lead to a net loss, would this have been deducted from the APV?
Thanks
For the first question, it is because the question asks to assess effect of ceasing production now. So the benefits of ceasing now are included.
Had the question requested us to assess the impact of ceasing production over time, none the net benefit of ceasing now would not have been considered.
Is it correct?
Thanks
Closing now will save a net (2.3-1.7) and we always include cash savings just as we include cash costs in project appraisal.
Correct as far as your other questions are concerned.
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