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OKAN CO (SEP/DEC 19)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › OKAN CO (SEP/DEC 19)

  • This topic has 3 replies, 2 voices, and was last updated 9 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 10, 2022 at 8:14 am #652967
    Frooti
    Participant
    • Topics: 80
    • Replies: 75
    • ☆☆

    Appendix 2b (Part (b) (ii)): Projects Alpha and Beta, adjusted present value (APV), in
    six months’ time
    Issue costs = 3/97 × Y$24,538,000 = Y$758,907
    Annual tax shield = 2.1% × Y$24,538,000 × 20% = Y$103,060
    Annual interest saved on subsidised loan = 2.9% × Y$24,538,000 × 80% = Y$569,282
    Annuity factor, years 1 to 4 at 5% interest = 3.546
    Present value of the tax shield and loan subsidy benefit = (Y$103,060 + Y$569,282) ×
    3.546 = Y$2,384,125
    Project Alpha APV Y$
    Base case NPV of Project Alpha (appendix 2a) 5,272,000
    Issue costs (758,907
    Present value of the tax shield and loan subsidy benefit 2,384,125
    –––––––––
    APV 6,897,218

    Pls explain this calculation part

    April 10, 2022 at 9:20 am #652977
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51563
    • ☆☆☆☆☆

    You will have to say which bit of the calculation you are not clear about.

    Always with APV calculations, we take the base case NPV and then adjust for the issue costs, the tax saving on debt, and any subsidy benefit (as explained in my free lectures).

    April 13, 2022 at 5:07 am #653200
    Frooti
    Participant
    • Topics: 80
    • Replies: 75
    • ☆☆

    issue cost , tax shield , tax saved

    April 13, 2022 at 8:37 am #653222
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51563
    • ☆☆☆☆☆

    Given that the issue costs are 3% of the gross proceeds, the net proceeds must be 97% and therefore the issue costs are 3/97 x 24,538,000.

    The tax saving is 20% (tax rate) x 24,538,000 (borrowing) x 2.1% (interest rate) per year for 4 years and therefore the PV of the tax saving is the yearly saving discounted for 4 years (using the 4 year annuity factor at 5%).

    The net of tax interest saved on the subsidised loan is 5 – 2.1 = 2.9% x the borrowing x 80% (i.e. after tax of 20%). This is the saving each year for 4 years and therefore we again discount for 4 years at 5% to get the PV of the saving.

    Have you not watched my free lectures on APV?

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