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Hello
Can you help me to understand the calculation in Q2 of September/December 2016 sample questions?
It asks to calculate the % change in the selling price required for the investment to have a zero NPV. I can’t understand why do we multiply revenue cash flows by 0.75 and why we are dividing NPV by discounted revenue cash flows. Can you explain please or provide any formula?
Thanks
Justyna
With regard to multiplying the revenue cash flows by 0.75, this is because if the revenue changes then to will the tax change (by 25% of the change in the revenue).
With regard to why we divided the NPV by the discounted revenue flows – you need to watch my free lectures on investment appraisal under uncertainty for Paper F9 (this is revision of Paper F9). It is explained in the lectures and I am not going to type them all out here 🙂
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