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Depreciation on ROCE (investment appraisal method) and on Payback period

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Depreciation on ROCE (investment appraisal method) and on Payback period

  • This topic has 2 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • September 2, 2018 at 11:48 am #470812
    dimeroglev
    Participant
    • Topics: 9
    • Replies: 5
    • ☆

    Hello Mr. Moffat,
    1. Q. 90 Rev. Kit BPP Latest edition says:

    What is the ROCE (using the avge investment method)
    Roce has depreciaton deducted from the per annum cashflows in it’s formula.

    In this question what is given is the operating profits – so these are after depreciation.
    So when the q. states that operational profits are given these are after depreciation and depreciation shouldn’t be deducted.

    How about the payback period?

    Q 91 What is the payback period for the investment?
    Depreciation per annum is added to the cash flows to calculate the payback period.
    Do I always add dep. to the cashflows when calculating the payback period?

    The discounted payback period Q 136 doesn’t add dep. to cashflows.

    When should I add depreciation to cashflows to calculate the payback period?

    2. Q225
    Cant co has a cost of equity od 10%

    Current year: no dividend
    Y 1: No dividend
    Y2 $0.25 per share
    Y3 $0.50 per share and increasing by 3% per year

    What is current share price using div. valuation model?

    Y2 $0.25 * 0.826 = $0.2065

    Y3 $0.50 …………………………….*(1+0.03)not used in formula
    ————— = 7.143
    (0.1 – 0.03)

    7.143 * 0.826 = 5.9

    total 5.9+0.2065 = 6.11
    for 7.143 why is it * 0.826 the Y2@10% discount factor when the question clearly states it’s Y3 dividend.?
    Why the formula doesn’t use the $0.50 * (1+g) ?

    3.Lease vs Buy

    For annual lease payments starting immediately from Y0, tax savings should always correspond with the timing of tax savings in the buy option? one year in arrears as per question.
    So Y0 Annual lease payment 1000 is actualy for Y1, for which tax is paid one year in arrears so starting from Year 2. Right?

    4. Bank loans used in WACC section C.
    If Bank loan is with variable rate, for cost of bank loan I use the cost of loan notes calculated as IRR at after tax cash flows.?
    The MV of the bank loan is the book value as per the statement of the financial position?

    September 2, 2018 at 8:28 pm #470871
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Sorry, but the answers to all of your questions are fully explained in my free lectures.

    The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

    You cannot expect me to type out all of my lectures here 🙂

    September 2, 2018 at 8:29 pm #470872
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    There is no point in posting the same question two times !!!

    See my reply to your other post of this question.

  • Author
    Posts
Viewing 3 posts - 1 through 3 (of 3 total)
  • The topic ‘Depreciation on ROCE (investment appraisal method) and on Payback period’ is closed to new replies.

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