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hello sir,
this is part b of the question
b) using nominal terms approach , calculate npv of the project of buying new technology and advise whether asop co should undertake the proposed investment.why have they not included the tax relief in calculating npv?
Also why have they not included the licence fee in calculating the npv?thankyou
They have – the have used the PV from part (a) which does include both.
but sir, part a is discounted using 6% ryt? but part b requires us to dicount using wacc 11%.
hows that possible to add npv calculated with 6% df to npv of 11%?Part (a) is just deciding whether they should lease or buy, and for this decision we discount at the cost of borrowing of (in this case) 6%.
Part (b) is asking for the calculation of the NPV of the project and for investment appraisal we always use the WACC of (in this case) 11%.
Your point about using the PV of the cost of financing at 6% is valid, which is why the examiner states in his answer that discounting the financing flows at 11% instead was also acceptable. (It would actually have been more sensible!).
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