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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?
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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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