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Hi, Gormit,
1. I have some questions for JUNE 12 P5. For the Q1, The part(ii), when calculate the NPV AND MIRR, my answer is as follows: we need to use the free cash flow to firm method to calculate the cash flows as cost of capital is given.
10 11 12
PBIT 31200 199579 262322
LESS INT. (29400) (29400) (29400)
LESS TAX (540) (51504) (69877)
ADD dep. 120000 120000 120000
FCF 121260 239125 283045
Then use the cash flow listed above as a start point of NPV. BUT the examiner answer just less the tax as a final cash flow. I think it might be wrong, because in P4, I remembered if we were given the cost of capital, we should use the free cash flow to firm. but the examiner use the free cash flow to equity, what’s wrong with my answer?2. the next one is calculating the MIRR, I just use the figure in the NPV calculations. I am not sure whether is right or not? also I do not know what is the useful of ‘4.5% on any returns in its deposit account’ been given by the case?
thanks for your patient to addressing my questions!
The simplest way to do MIRR is to discount all outflows to time 0 and project all inflows to the terminal period.
So 600,000 was invested at time 0
There are free cash flows (after tax and adding depreciation back as on P16 of the examiner’s answer) of 141,840 at time 1, 259,705 at time 2 and 303,626 at time 3.
These can be invested when received at 4.5% and at time 3 will amount to:
1.045 x 1.045 x 141,840 + 1.045 x 259,705 + 303,626 = 729,910
Then simply find the IRR of the 600,000 out at time 0 and 729,910 in at time 3.
I know it should be discounted all cash flow when calculating the MIRR. I just want to know I do not use the 4.5% information. Use the PV of return phrase and PV of investment to calculate. Is that right in this case?
2 I think use the 141840 is not correct when calculate NPV. We should use 121260 instead in accordance with the method of calculating FREE CASH FLOW TO FIRM! Is that right?
Thanks in advance.Dear Mr Gromit,
I have the same confusing problem with 310zcx.
I did not use 4.5% to calculate the MIRR but the same discount rate in estimating the NPV.Would you please help us understanding the logic behind the use of 4.5% from the examiner’s answer?
Many thanks
Hanhvn
Hi Hanhav
Did you understand when calculate the NPV, why examiner use 141840? When calculate the free cash flow to firm we should deduct the interest and tax as well, but the answer only deduct the tax? At I explained above, if deduct interest and tax, added depreciation, the result would be 121260.so I am confused about it. Would you know the reason behind it? Thanks.You use 4.5 because that’s what you could invest the inflows at so that they grow for a few years.
Whenever you do NPV, whether here or a simple F9 type of project appraisal, you never deduce interest. The discounting calculation takes the place of interest – it’s a bit like doing interest backwards.
You use 4.5 because that’s what you could invest the inflows at so that they grow for a few years.
Whenever you do NPV, whether here or a simple F9 type of project appraisal, you never deduce interest. The discounting calculation takes the place of interest – it’s a bit like doing interest backwards.
You use 4.5 because that’s what you could invest the inflows at so that they grow for a few years.
Whenever you do NPV, whether here or a simple F9 type of project appraisal, you never deduce interest. The discounting calculation takes the place of interest – it’s a bit like doing interest backwards.
Hi 310zcx
From my thinking, we are calculating NPV using free cash flow to the firm as a whole not free CF to equity (FCFE) thus we use the PBIT less tax add back depreciation.
If we calculate the value of the equity only then we deduct the interest.
Cheerr
HanhvnThanks Gromit and Hanhav.
However, Hanhav, have a look of feedback Gormit replied above. When calculate the NPV, we should not deduce interest, that is to say interest should not be doubled calculating. So if the question ask FCF to equity, I think we shou do not deduce interest. What do you think?Hi 310zcx
I agree with you Mr Gromit did advise that in P5 (or F9), if we are asked to calculate the NPV we simply take the PBIT after tax add back the depreciation and that is all. We do not have to worry about the FCFF or FCFE.
But if we are in preparation for P4, we have to take into account the FCFF & FCFE carefully.
Cheers
Hanhvn- Topics: 0
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Thanks for the question, I have the same confusing when reading answer from examiner. I have an idea to result in 141840 from PBIT 31200 add depreciation 120000 minus tax ( as per net income calculating) -540 and minus tax relief from interest ( the similar method in calculating EVA) which is 30% interest charge of 29400 is -8820.
Then 31200+120000-540-8820=141840
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