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- This topic has 4 replies, 2 voices, and was last updated 6 years ago by richardscully.
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- October 10, 2017 at 2:43 pm #410198
Dear Sir
I would be interested on your take of this particular question. I notice in the answer given in the BPP revision kit it leaves out the majority of items to be added back and even admits doing so. What a bummer, my correct (I believe) answer would be wrong by the admission of the examiner themselves. I added back 14 years of 50% of the marketing cost (7368). I too added the rents and used the variable rent actual as the NOPAT depreciation on lease and added back the budgeted variable rent figure plus amortized the cafes over 5 years. I included property tax as part of the rents (capitalized).The examiner did not capitalize any rents and did not add back deferred tax and i don’t know how they came to their interest figure, mine was 600750……sorry to bore you with this but I think the examiners can fail us on a whim….or it feels like it
October 10, 2017 at 6:42 pm #410260So, I think we all agree that 50% of the marketing should be added back.
I don’t know why you think rents should be added back. Rent is an expense and I don’t recall seeing an example where it was added back to get NOPAT. The idea of adding amounts back to get NOPAT is to recognise that the expenditure is more in the nature of capital than revenue.
The question stated that the company has agreed that all its rents are performance related. The question does not say that this was an up-front payment: it couldn’t be because rent depends on revenue generated.
The loss of tax relief on interest is simply 801,000 x 25% = 200,250. Remember the answer started with operating profit ie before interest. NOPAT is before interest, but after tax; the tax of 2,100,000 paid would have been 200,250 more if calculated before interest.
HTH
October 11, 2017 at 3:26 am #410283Hi
Thanks,
i thought the idea of EVA was to take things like rents and leases and capitalize them. The Cafe rents are 5 yearly deals while juice are paid on performanceOctober 11, 2017 at 7:24 am #410293Yes. However, you can’t do that with the information available.
You don’t know what Cafe’s rents will be. If you did capitalise Juicey’s, you would need to know how far through the agreement the lease was otherwise how much should be added to capital employed (ie the unamortised portion)? You would also need to amortise the lease -and that would presumably be like the annual rent anyhow.
I think the question does try to lead better candidates ‘up the garden path’. However, if you have to capitalise leases you have to be told about their amortisation rate, their age and how much to capitalise in the first place.
October 11, 2017 at 5:32 pm #410406lol…….and some of the not so better candidates as well….every time i think i got this calculation it throws another punch
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