neptune 6/08

They are a sunk cost (the money has already been spent) and we always ignore sunk costs.
(They may well charge them in their profit statements, but we are not doing profit statements – we are looking at future cash flows, and this cash flow has already occurred whether or not we do the project.)

Have you watched the free lecture on APV??

I make it very clear in this lecture that you can either use the risk free rate or alternatively you can use the return on debt. There are arguments for both (and I explain why in the lecture) but in the exam you get full marks for using either (even though obviously the final numbers are different).

I don’t know which book you are using to look at the answer.

I am guessing that it is BPP, in which case although it looks like there are 6 allowances, in fact if you look at the ‘year of tax benefit’ you will see that there are actually only 5 (they have shown both depreciation and balancing charge calculations separately for 20Y4, whereas you could have got the same result for 20Y4 by not having depreciation and just having a balancing charge for that year).

With regard to the timing of the tax benefits – it is one year later. Again, it may be in your book that they have shown it in the wrong columns (they have in my book – it is a typing mistake) however when you come to add up to get the net cash flow, they have added up as though they were all one year later (as they should be). So the final result is actually correct.