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- This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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- January 18, 2023 at 5:14 pm #676930
All the questions I mentioned here are the ones i found difficulty in calculating . So I cannot say which part of the question I do not understand.

JuicyCo is considering investing in a new industrial juice for use on a new contract. It will cost $150,000 and will last 2 years. Juicy Co pays corporation tax at 30%(as the cashflows occur) and, due to the health benefits of juicing, the machine attracts 100% tax-allowable depreciation immediately. Given a cost of capital of 10% ,what is the minimum value of the pre-tax contrac trevenue receivable in two years which would be required to recover the net cost of the juicer?

A lease versus buy evaluation has been performed. The management accountant performed the calculation by taking the saved initial outlay and deducting the tax-adjusted lease payments and the lost capita lallowances. The accountant discounted the net cashflows at the post-tax cost of borrowing. The resultant net present value(NPV) was positive. Assuming the calculation is free from arithmetical errors, what would the conclusion for this decision be?

The answer is lease is better than buy. Can you explain why is it so?

NBCo is faced with an immediate capital constraint

of $100m available to invest. It is considering investing in four divisible projectsInitial cost ($m) NPV ($m)

P1 40 4

P2 30 5

P3 50 6

P4 60 5What is the NPV generated from the optimum investment programme if the projects were indivisible? $ ______ m

The answer is 11 . The combination of projects they took is 2 and 3. But I do have a doubt here how the combination would be 2 and 3 since the investment is $100 m . Well, 2 and 3 would only give 80 m. The answer i got is 10.9 or something

January 19, 2023 at 10:21 am #677022For the first question, the flows described are the savings resulting from leasing rather than from buying. Since the PV of these flows is positive, it means than leasing it better than buying.

Have you watched my free lectures on lease and buy?

For the. second question, the optimum is whichever combination gives the highest NPV.

2 and 3 give an NPV of 11, which is the highest. The amount invested is of no relevant provided that it is not more than 100m.Again, it would seem that you have not watched my lectures on capital rationing.

January 20, 2023 at 1:47 pm #677095No , I didn’t . I went for offline class.. I find some questions in BPP really hard to crack which are those I mentioned here . Even I try to grasp the solution , but I still don’t understand 🙁

January 20, 2023 at 2:02 pm #677097I suggest that you do watch my lectures because I work through examples like this and explain what is happening.

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