- This topic has 3 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Good Morning
sir, at the outset, if my question is not fair, simply ignore my post and i will understand.
I did a 90 minute question and the scenario involved a power generating company wanting to acquire a coal mine.
i was able to understand that an NPV had to be calculated since the question said: “write a report to your finance director on whether the coal mine should be acquired.”
my cashflow working were were all correct.
when i looked at the answer, it had used the APV method. and i realized what i had done was to answer the question as if it was an F9 paper.
to be honest, my mind never even went to the APV method – which i am sure is due to lack of practice.
my question is: how do we decide if we have to use APV? and what to look for in a question for hints to use APV.
thank u
Firstly, these days most exam questions specifically say in the requirements if they want you to take an APV approach.
If they do not say in the question, then you must state your assumption (which depends on whether the gearing of the company appears to be changing substantially – if it is then do APV (but say why you are doing APV); if it does not then don’t use APV (but again say why not). There is no definition of what makes a change substantial, but it should be pretty clear from the way the project is being financed whether or not it is a big change.
Secondly, not doing APV will not mean you get no marks. Most of the cash flows will be the same anyway, and the markers for P4 are very good and will understand what you have done (assuming obviously that as always you show your workings neatly so that the market can follow them). There is no reason at all why you should not still be able to easily get the 50% pass marks. (Although you would be penalised more if the question did specifically ask for APV and you didn’t – but even then you will still get marks for what you have done.)
- You must be logged in to reply to this topic.