Qs 76 intergrand ..bpp kit

Qs 76 intergrand I found this qs a difficult ..I don't understand why they are doing apv and free cash flows separately ..isn't the apv start off from the normal layout as in npv except the interest which is ignored in fcf .. In an exam how will I understand seeing the qs that I have to separate the two then put fcf value in apv ..it starts from redundancy ..publicity ..why didn't we do these in fcf directly . Here apv is used to value the oberberg Aren't we supposed to discount it at ungeared cost of equity This qs is quite confusing me at this moment and I m losing my exam confidence Please guide me over these sort of info

First question: To get the discount factor from 4 to infinity, you either take the df for 1 to infinity and subtract the annuity factor for 1 to 3 (which is what the answer in the book as done). Ot alternatively you take the df for 1 to infinity and multiply by the normal present value factor for 3 years (because it starts 3 years late) which is what you want to do. Both give the same answer. The reason what you have typed is wrong is because the 3 year discount factor is not 1.683 - it is 0.683. 0.42/0.1 x 0.683 = 2.87

Second question: Maybe the layout of the answer has confused you, but the question specifically says to take the free cash flows of Oberberg discounted at the all-equity rate (so effectively APV) and the answer has done that (to get the 171.2). The question then carries on to say that this should be adjusted by the PV of 'all other relevant cash flows discounted at appropriate rates'. The 'other relevant cash flows' are as always the tax shield, but also things like redundancy which is relevant to the decision but is not a cash flow of Oberberg.

O very much thanks sir !! It up to some extent clarifies concept! I will try to attempt this again ...to get complete grasp

You are welcome :-)