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Hi,
I am facing some problems with the Investment appraisal question of Dec09 attempt. (Question 01). Page number 32 Kaplan kit)In part b of this question the requirement is to calculate the net present value in nominal terms. but in the answer the examiner only used the operating cost saving and tax as relevant cash flows. other flows those are directly related with the project such as License fee and the tax savings on capital allowances are not included in the answer,, WHYY??
On the other hand,if we assume that the reason for not including the license fee in calculation is that it is the part of operating cost . but what is the reason for not including tax saving on capital allowances in calculations.. and the last but not least , why examiner include the present value of investment either taking the real value.Waiting for the positive response. Thank you..!
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the reason for only consider cost saving and tax is that other relevant cash flow has aready been considered in part a calculation. and the result of part a has been considered at the end of part b.
if u considered in part b for all the relevent cash flow, it will be perfectly acceptable. however, it will be a waste of time.tax saving also been considered in part a and the same reason as above.
when compare lease or buy decision, we can only use post tax interest rate. you can take all the relevant cash flow of buying into part b and using wacc as a discount rate and get a figure.
it will be waste of time but it is more accurate.
Hi,
If you look at the marking scheme of the Dec 09 paper, you will notice that the examiner has commented at the end of the answer to part (b) that including financing cashflows and discounting them using WACC is also acceptable.
If you include everything, tax savings on capital allowances and all, you will get an NPV of about 141000 which is also acceptable as that is the answer shown in the BPP revision kit for this question. Hope that helps.
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