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requirement a
Expected NPV =$(330,000)
APV = $ 13618
1) Can you explain me the main reason behind this difference???
2) Should i accept the project, i m confused here because will actual outcome will be positive or not as outcome in 2 method are different….????
But the examiners answer to part (b) explains the reason (as I do as well in my free lectures on APV!!).
When there is a substantial change in the gearing (as there is here) then APV is a better approach. NPV assume not significant change in the risk and no significant change in the level of gearing.
The question does not ask whether the project should be accepted or not – just to discuss the validity of the views of the two managers. However, the examiners answer does make it clear that (subject obviously to the assumptions involved in APV) that APV is the better approach.
In this question when calculating tax saving due to tax allowable depreciation why examiner didn’t calculate tax allowable depreciation as balancing figure in year 4
as followyear 3 WDV $1856
TAD (balancing) $956 tax saving at 30% = ($956*30%)=$286.8Realisable value
$(1500-600) $900Bpp kit Mock 2 question 3 in solution what they did was
Year 4 TAD = $1856(yr 3 WDV)*25% = $464
Tax saving =$464*30%=$139
can you explain me why they did the calculation this way and
if i do it my way as i have show above will it be ok…???
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