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Hi
part c of the question asks how to adjust the discount rates for the increased risk of the nuclear power station
the solution says ‘a further way of dealing with the high uncertainty attached to the cost of the decommissioning is to decrease the discount rate for the cost figure used’
It is my understanding that we should increase the discount rate for riskier projects, e.g. to compensate investors for the higher risk??
Overall, you would be correct (discount the inflows at a higher rate and the NPV will be lower).
However, they are referring only to the cost of decommissioning . If you discount this cost at a lower rate, then the PV of the cost will be higher (and therefore the NPV will be lower).
Hi Mr Moffat! Thanks for the wonderful work you do with opentuition … invaluable resource.
Please do you have a link for their fuelit question ACCA December 2000? I can’t find it online
Thanks in advance
No, I do not have a link to it – sorry.
I do not even have the question myself any longer because it is so old. It used to be in the BPP Revision Kit, but they have now stopped including it in the kit.
I assume that you do have a current edition of a Revision Kit from either BPP or Kaplan, in which case you have more than enough questions to practice in the style of the current examiner (the examiner has changed three times since the question Fuelit was asked) 🙂
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