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“If the contract is terminated within the next 2 years, Play Co will be charged an immediate penalty of $150,000 which ll not be allowed as a tax deductible expense”
Sir my question is why are we adjusting for the penalty of termination of contract how is it a relevant cash flow? Because nowhere does the question mention that they are planning to end it before the mark of 2 years, they have even given values upto year 4.
And even if it is a relevant cash flow isn’t it the money we save because we ll never pay the penalty because from the question it doesn’t seem like the company ll terminate the contract so as it is a benefit, it should be added to the NPV but we are deducting it
Edit: the question does mention that they plan to switch and produce particles in house by using tyres. It makes a lot of sense now, my apologies
I do not have the Kaplan Kit (only the BPP Revision Kit) and so I cannot really help you without seeing the whole question.
If it is marked as being a past exam question then tell me the month and year of the exam because I have all past exam questions and will be able to find it 🙂
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