- This topic has 3 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
(1) Why the answer use the rate of the subsidised loan as 7% and not the 6% as stated in the question. Additionally , why was interest savings calculated since the entire amount was given as subsidy.
(2) kindly explain why the closure cost and sale of asset for X -IT when production ceased in USA is not part of the assessment for closure cash flows. I see this is used in the Overall position(NPV of moving to Gamala & APV Computation). My understanding was to set out a npv calculation for ceasing the production of X-IT in USA and treat these items as year 4 cash flows.
(3) For the subsidy, why couldn’t we use the annuity formula and convert the cash flow at year 4 exchange rate .
1) The interest rate used is the 6% as stated in the question.
The 7% is the benefit of the subsidy (13% – 6%)
Getting a subsidised loan does mean that the are getting an extra benefit, but the benefit is the interest saving.2) Closure costs are only relevant is production is stopped immediately (and these are included in appendix 1 of the answer). If it is stopped over four years, then the closure costs will equal the revenue from the sale of assets, so no net cash flow.
3) No, because they are benefiting each year, and the exchange rate changes each year.
- You must be logged in to reply to this topic.