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FM Investment Appraisal question

Forums › ACCA Forums › ACCA FM Financial Management Forums › FM Investment Appraisal question

  • This topic has 2 replies, 2 voices, and was last updated 8 months ago by John Moffat.
Viewing 3 posts - 1 through 3 (of 3 total)
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  • April 26, 2020 at 4:43 am #569248
    Pallavibansal09
    • Topics: 1
    • Replies: 1
    • ☆

    Please could you solve and explain this-

    A project is expected to generate pre-tax income of $90,000 per annum, starting in one year
    and running in perpetuity. Tax is payable 12 months in arrears at 20%. The after tax cost of
    capital is 8%.
    What is the PV of the project flows (to the nearest $000)?

    April 26, 2020 at 5:42 am #569251
    Pallavibansal09
    • Topics: 1
    • Replies: 1
    • ☆

    PV = 90/0.08 – {(90 × 0.2)/0.08) × 1/1.08} = 916,667

    In the answer why is it not {90/0.08 – (90 × 0.2)/0.08)} × 1/1.08

    April 26, 2020 at 9:29 am #569266
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 41510
    • ☆☆☆☆☆

    Because the tax is payable 1 year in arrears and therefore the tax needs discounting for 1 extra year.

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