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Dear tutor,
Can u explain for me this point ” the interest payment on the finance for a new project are relevant include to the project decisuin but are not taken into account in any NPV calculations. The interest payments will already be “built in” to the calculation in the discount factor that is being applied”How can interest payment be built in discount factor???
If you have been watching my free lectures, then you will know that the discount rate we use is the weighted average cost of capital.
The weighted average cost of capital calculation includes the cost of the debt (and therefore of the interest) and the whole purpose of discounting is to account for the total cost of capital (including interest).
To include interest in the cash flows as well would effectively be taking it into account twice, and so we never include interest payments in the cash flows.
Yes i got it. I forgot that using weighted average c.o.c for discounting
Therefore
WAC = (c.o.c + cost of borrowing)/2In a question Warden Co. in BPP kit revision. Part (c) (ii), it asks to calculate sensitivity in selling price
Sensitivity = NPV / PV of sale revenue
the answer is
Taxation is taken into account to calculate sale revenue after taxWhy should we need to take into account taxation in this circumtance?
I though only sale revenue is enoughAnother thing i want to ask you about the sensitivity analysis to c.o.c
Is that Sensitivity to c.o.c = irr
Or we calculate like thisSensitivity to c.o.c = (irr – c.o.c) / c.o.c x 100
I found somewhere use first method and another use second. That very confusing. Please make clearly for me sir
The weighted average is certainly not (c.o.c + cost of borrowing) / 2 at all.
I have no idea what you mean by c.o.c, and the weighting of the cost of equity and the cost of debt depends on the market values.You need to watch my free lectures on the calculation of the weighted average cost of capital.
With regard to your second question, you must start a new thread when it is a new topic. This has nothing to do with interest.
If the revenue were to decrease by (say) $1 then the profit before tax would fall by $1 and the profit after tax would therefore fall by $1(1-T).
With regard to the IRR I suggest that you watch my free lectures on sensitivity. I cannot type out all of my lectures here 🙂
(The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
c.o.c means cost of capital
What i mean is
WAC = (Cost of capital + cost of borrowing)/2It does not equal that at all!! That would be complete nonsense.
The weighted average cost of capital is the weighted average of the cost of equity and the cost of debt, weighted by the total market values of the equity and debt.
Again, I really do think that you need to watch my free lectures.
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