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This topic has 5 replies, 3 voices, and was last updated 11 years ago by jemma242.

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April 18, 2015 at 2:34 pm #241711
jemma242
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Hi

I am really struggling with question one on June 2012’s paper….. the cost of capital is 12.5% how do I use this in the NPV calculation? I have looked at the answers looked at my book and it just doesnt make any sense to me.

thank you
Jemma
April 19, 2015 at 9:36 am #241787
Ken Garrett
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This is a very odd question and answer in the way it approaches NPV.

Don’t try to understand the examiner’s answer, but look at the note right at the end of the answer where NPV has been calculated as at the start of the project so that

Time 1 Free cash flow 141, 841/1.125 = 126,080 etc.

As I say, don’t worry about the other way that NPV has been done.
April 19, 2015 at 11:40 am #241803
jemma242
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ahh I see thank you!
April 19, 2015 at 7:31 pm #241855
samiirah
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hello , for the same ques i want to know why the int of 8.4% has nt been used to calculate wacc? Y wacc has been taken to be the ccost of capital ?
April 20, 2015 at 8:12 am #241884
samiirah
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you should use the formula
(1+r)^-n to calulate the discount factor
Year 1 discount factor (1+0.125)^-1
Year 2 Discount factor (1+0.125)^-2
April 20, 2015 at 7:23 pm #241966
jemma242
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Samirrah

I could be wrong but I read that the 8.4% is the fixed interest charge therefore does not include the equity element.

Next note reads the ‘John has estimated the overall cost of capital to be 12.5%’ therefore including both debt and equity element for the WACC.
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