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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Investment appraisal
Why are the statements below wrong ?
1) tax allowable depreciation is a relevant cash flow when evaluating borrowing to buy compared to leasing as a financing choice.
2) Asset replacement decisions require relevant cash flows to be discounted by the after-tax cost of debt.
3) if capital is rationed, divisible investment projects can be ranked by the profitability index when determining the optimal investment schedule
Have you watched my free lectures on this?
1. Depreciation is not a cash flow and is therefore not relevant.
2. There is no logic to discounting at the cost of debt. As always it is the WACC that is relevant.
3. This statement is not wrong. (You might have mistyped and written divisible instead of indivisible. Indivisible projects obviously cannot be ranked by the profitability index)
You really should watch my free lectures. They are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.
Thank you
You are welcome 🙂
what impact will the npv calculation have if all cash inflows and outflows occur at year ends?
We always do assume that operating cash flows occur at year ends (unless specifically told otherwise), and assuming that the inflows exceed the outflows then it will result in a lower NPV.
Have you watched the free lectures? Because as I explain in the lectures, making this assumption makes the discounting easier (because we only discount for whole years) and also adds an element of safety in the the actual NPV can only be higher than that calculated because the actual inflows can only be sooner that we are assuming.