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Hello Tutor, For PYQ June 2008 Question 5 part (a) of Neptune
1)I using the different method to calculate the NPV which the final answer is not the same with the examiner, which I first deduct the TAD from the operating cash flows and add back TAD after calculating the tax.
Why the examiner answer for capital allowance saving is for the same year for profit but in the question its mention 12 months after arises?
2) For the ungeared cost of equity, can I use the Modigliani and Miller proportion II to find the ungeared Ke rather than using ungeared asset beta as the answer have some difference with the examiner? Thank you
1. It would have made more sense for the capital allowance savings to have been one year later than in the answer (and that would still have got full marks). However the question does say that the saving is 12 months after the expenditure arises, and so if they invest at time 0 (the start of the first year) then the saving arises at time 1 which is 1 year later.
2. Yes, you can use the MM formula instead.
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