AGD CO 12/05

Presumably the company is already making profits and is already paying tax on those profits (which is what we always assume in Paper F9). If they buy this machine then they will have to pay 25,000 a year in maintenance costs. This will reduce their existing profits and therefore mean they will pay less tax (i.e. they will save tax). The amount of tax they will save (which is effectively an inflow) is 30% x 25,000 = 7,500 a year. (Because they have shown everything in thousands, they have rounded it to 8, but strictly it should be 7.5)

When this question was asked 10 years ago the syllabus was a lot different (and it wasn't even called F9). APR is examined at what is now F2 (it was not 10 years ago) and there is therefore little chance of it being asked in F9 - it never has been. So I would not worry too much about it. (Although Part (a) of the question is certainly examinable in F9). APR is simply the real yearly rate. They are paying 10% a year and so 5% every six months. Because of compounding, after 2 periods (of 6 months, i.e. one year it total) at 5% each period, every $100 borrowed would have grown to 100 x 1.05^2 = 110.25 So the total interest will have been 10.25, which is effectively 10.25/100 = 10.25% a year.

I said "there is little chance" :-)