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In investment appraisal:
Does initial investment in always at time 0 or can it also be on time 1?
Does capital allowance schedule always start from time 1 or can it also start from time 0?Unless the question specifically says to do differently (which is unlikely) the we always take the initial investment to be time 0.
Capital allowances may starts at time 1 or time 2 – it depends on the information given in the question, and I explain all about the tax timing in my lectures.
Sir Tax saving on capital allowances may start from time 1 or time 2 as you have explained in your lectures, but as far as tax allowable depreciation is concerned it always starts from time 1 or can it also start from time 0?
Sir I mean to ask like in Pelta co S/D 17, we will draw the capital allowance schedule as follows
CA schedule
Year —————- CA TSCA
1 —————- 6250
2 —————- 4688 1875
3 —————- 3516 1406
4 —————- 9297 1055Now here in CA (capital allowance) column, the first capital allowance has occurred at time 1 and first tax effect has occurred at time 2 ( and the reason for the first tax effect at time 2 you have already explained in the lecture and I have also understood by watching your lecture).
My question is that can it happen in any question (not talking regarding this question) that the first capital allowance (not talking about tax effect) occur at time 0 or time 2?
Or is it such that first capital allowance will always occur at time 1 in every question?The initial investment is at time 0, the start of the first year.
CA’s are always calculated at the end of the accounting period, so the first calculation is at the end of the first year which is time 1. The tax saving in this question is one year later and is therefore at time 2.
This is exactly as I explain in my lectures.
The proposed new project is to open a number of new supermarkets in country T, a neighbouring country, which uses currency T$. Market research has already been undertaken at a cost of D$ 0.3
million. If the purposed project is approved additional logistics planning will be commissioned at a
cost of D$ 0.38 million payable at the start of 20X0.Other forecast project cash flows:
Initial investment on 1 January 20X0 T$ million 150
Residual value at the end of 20X4 T$ million 40
Net operating cash inflows:20X0 T$ million 45
20X1 and 20X2 growing at 20% a year from 20X0 levels
20X3 and 20X4 growing at 6% a year from 20X2 levelsAdditional information:
On 1 January 20X0, the spot rate for converting D$ to T$ is expected to be D$1 = T$ 2.1145.
Dominique has received two conflicting exchange rate forecasts for the D$/T$ during the life of the project as follows:Forecast A A stable exchange rate of D$1= T$2.1145
Forecast B A devaluation of the T$ against the D$ of 5.4% a year
Business tax is 20% in Country T, payable in the year in which it is incurred.
Tax depreciation allowances are available in Country T at 20% a year on a reducing balance basis.
All net cash flows in Country T are to be remitted to Country D at the end of each year
An additional 5% tax is payable in Country D based on remitted net cash flows net of D$ costs but no tax is payable or refundable on the initial investment and residual value capital flows.
The project is to be evaluated, in D$ , at a discount rate of 12% over a five year period.
Required:
(a) Calculate the initial investment for the new project.
(b) Calculate the D$ NPV of the project cash flows as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.
(c) Calculate and discuss the MIRR of the project as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.
(d) Calculate the Pay Back Period for the project at 1 January 20X0
How do I go about this please? The additional information is confusing
This question is not examinable in Paper FM.
MIRR is not in the syllabus for Paper FM, and neither can you be asked to deal with an investment in a foreign country in the Paper FM exam – these are Paper AFM topics, and the free lectures for Paper AFM explain how to deal with it.
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