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NPV with finance cost of the investment Question!

Forums › ACCA Forums › ACCA FM Financial Management Forums › NPV with finance cost of the investment Question!

  • This topic has 1 reply, 2 voices, and was last updated 13 years ago by Anonymous.
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  • November 29, 2011 at 12:35 pm #50783
    katieliu
    Member
    • Topics: 18
    • Replies: 19
    • ☆

    Dec 09 ASOP Co

    a) asked the lease or buy option. I can understand they use the 6% after tax rate to compare two options.

    But in b) Why they deduct the PV of financing cost using 6% DF to get a NPV

    I just do it like a normal way include the cost of savings, licence fee (inflated), then get the CF before tax. tax deducted, leave a net cashflow after tax. then add capital investment, residual value, and tax relief on CA. Then, using DF of 11%
    to get NPV.

    I think the main difference btw my way and the answer is answer involved 6% in the working of investment costs. but I use 11% of company’s cost of capital.

    What will be asked in the exam if they mean to involve 6% of borrowing cost?

    December 1, 2011 at 7:51 am #90381
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 52
    • ☆☆

    if u use 11%?which is more accurate than using 6%. however ,the examiner said you do not need to do that for this quesiton, as it only give 6 marks. use the pv of buying caclulated by 6% is acceptable.

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