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why the excess asset and redundancy cost not discounted and not included in NPV calculation and its included in Apv
in calculating subsidiary benefit why we didn’t t take the reaming loan or fund if is 6% as the subsidiary and the renaming 94 %
You will have to tell me which exam it is from (e.g. June 2010). I cannot remember which exam every question appeared in (and I haven’t time to look through every single exam to find it 🙂 )
Sorry, but there is no question called Tramont in either the June 2012 exam of the December 2012 exam.
The excess assets and redundancy costs have not been discounted because the cash flows would occur immediately (i.e. at time 0 ).
Whether you show them in the NPV workings or list them in arriving at the APV does not matter – it makes no difference to the final total.
With regard to the subsidy – they are paying interest at 6% whereas the commercial rate (from the question) is 13%. So they are getting a subsidy of 13 – 6 = 7% interest. There is no remaining 94% of anything.
Sir,
Why in calculating financing effects for APV, 5% was taken as a discount rate but not the 13%?
am I right that we could take as a discount rate the following rates (assuming that all of them are risk – free):
1) Risk free rate of 3%
2) 13% and
3) 5%?How to deal with interest rates in such situations?
So it is a bit confusing regarding the rates for APV in this particular question…
I agree that it can be a bit confusing.
However in these questions you will always be told somewhere the “risk-free rate” because it is needed elsewhere in order to use CAPM to get an all equity discount rate.
The safest is to always discount the financing effects at this risk-free rate (of in this question 3%), and that will always get full marks.
(In this question the examiner did use 5% and explains why, but as he wrote (and always writes) using 3% would be equally valid for the marks)
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