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Dear Jonh,
I have so many unclear issues relevant to the question, pls. help to clarify
Why the equipment be depreciated with reducing basis over 6 years while the project just have 5 years of lifetime
The indirect cost of 140M is totally ignored due to it’s not specific cost? and 150M included in project cash flow is opportunity cost?
Why the Answer do not add the Net taxing savings on Interest of the new investment without refinancing, due to even without refinancing, the existing captial structure still employ 25% debt finance, pls. explain
Much thanks
1. The examiner has got his tax wrong (it was the previous examiner and he seemed a bit confused about tax!). There should only have been 5 years of allowances, with the first one being calculate for 20X9
2. the 140M is ignored, not because it is indirect but because it is activity based. The fact it is activity based suggests that it is an apportionment of an existing fixed total and not an extra cost to the business.
Yes – the 150M is an opportunity cost.3. The question asks for the APV which means we need to take the NPV of the project as if all equity financed, and then add on the tax benefit from the finance being used for the project. They are already getting tax benefit on the existing finance and so this will not change with or without the new project.
So the APV just be justified whenever a significant debt finance be employed in a project? for example >50% debt finance if not the NPV could be used, pls
Thanks
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