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why the fixed cost of 1.7m is included in the cash flow, only incremental fixed cash flow should be allowed isn’t it?
Also how is the terminal value arrived and why it is not taxed.
Sir what is the difference between realisable value and residual value in this type of question.Since they are based in Dubai and are building a new hotel in London, the fixed costs must all be extra to what they currently have – they must all arise as a result of the new project.
The terminal value has been calculated by inflating at the rate at which property values are expected to increase (8%).
Realisable / residual values mean the same thing in this type of question.
The reason it has not been taxed is because there is no mention that it will actually be sold (we are putting in a final value to effectively replace the future potential cash flows). However, if you did tax it then it would not lose you marks – it is really an assumption (and you should state any assumptions).
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