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Dear Sir,
Why no tax was deducted from Free cash Flow computation when considering the Bahari project part b?
Also in Dec 2013 no 3, no tax was deducted as well from free cash flow again.
Is it a mistake to take out tax in these situations?
For No.1 in Dec 2013, using BSOP Pe=28m is less than Pa=30.62m, is there any implications to discuss for this?, as the project first gives -ve NPV, but overall the NPV is +ve when considering the offer.
Thank you
keyboard: please stop answering questions in this forum. It is Ask the ACCA Tutor, and you are not the tutor. Answer in the general P4 forum.
unsworth:
With regard to the free cash flow, keyboard is correct. The figure given in the question for free cash flow would already have been after tax, and so it would be wrong to take off tax again.
With regard to the option pricing question, the project gives a negative NPV ignoring the option to delay and without this option we would therefore not go ahead. However, having the option to delay is valuable to us (and we can calculate it using the option pricing formula).
So…..provided that we do have the option to delay, then it is worthwhile going ahead because the overall NPV becomes positive.Thank you sir, I understand your point. But does it means that there is no possible implication/issue accepting the offer despite the present value of the cash flows is greater than the exercise price of the offer?..
No – the fact that the NPV is greater than the exercise price is the main factor that is making the option valuable. If it were less then we would not find the option attractive.
No – the fact that the NPV is greater than the exercise price is the main factor that is making the option valuable. If it were less then we would not find the option attractive.
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