- This topic has 14 replies, 4 voices, and was last updated 5 years ago by
.
- Posts
Part B) (ii)
1. Will I earn the mark if the capital allowance is calculated as 15% x (35,000 – 7,000) = 4,200 p.a. (Year 1 to 4)? I think this way is more prudent than the suggested solution.
2. Why the working capital for Year 1 to 3 is not taking the incremental amount? Based on my calculations, Year 1 is 1,972 – 1,032 = (940), Year 2 is 2,496 – 1,972 = (524) and Year 3 is 1,144 – 2,496 = 1,352.
Part B) (iii)
This part of question only asks to address about initial variables of Honua Co’s real options. In the suggested solution for this part of the question, I am surprised to see that there is an explanation of Asset value of Jigu Project. As per my understanding, Jigu Project is not part of the Honua Co’s offer. When I read the statement that Talam Co’s FD wants to know how the asset value of $46.1m has been estimated, I thought that explanation should be included in the body of the report.
1. No you would not get the mark because what you suggest is wrong. We are not calculating financial accounting depreciation and so prudence is of no relevance. We are using tax rules, and the tax rule is that the capital allowances are always calculated based on the initial cost – any sale proceeds are dealt with by means of a balancing allowance or balancing charge.
I cover this in my lectures, and if you have forgotten the rules from Paper FM (was F9) then watch also the Paper FM lectures on investment appraisal with tax.2. You have misread the question and the examiner’s answer is correct.
The question says that the project will require *additional* working capital of 10% for every $1 increase in the revenue. The additional working capital needed at time 1 is therefore 10% x (24,883 – 5,160) = 1,972.B(ii) The question asks you to address the requests made by the finance director, and earlier in the question it says ‘Talam Co’s finance direct wants to know how the asset value of $46,100,000 (which is for Jigu) has been estimated’.
Sir please guide what is asset value of jugu project and how it is calculated i dont know the term asset value
The asset value is the value of the asset. When the asset in question is a project as it is here, then it is the present value of the future cash flows from the project (as calculated in the normal way and as shown in the examiners answer).
Given that the project requires an investment of $60M and has a NPV of $10M, then the PV of the flows from the project must be $70M.
However the investment is in 4 years time and so the $70M is the PV in 4 years time, and so needs discounting for 4 years at 11% to get the PV ‘now’.Hello, sir.
How is the volatility of Honua co. 30%?
I tried using the d2= d1- s root of t, but didnt get 30%. Pls help.d2 = d1 – s root t
Therefore
0.355 = 0.779 – s root 2s root 2 = 0.779 – 0.355 = 0.424
s = 0.424 / root 2 = 0.424 / 1.414 = 0.30 (or 30%)
In part c can u please tell me the basic idea behind the scenario and some points that would help me to generalize my answer as per the impact on talam co for.making drones in dunia at cheaper prices and also how the young teenage children are affected and scenario has asked of which practice stopped would harm teenagers
You are going to have to be more specific about what it is you are not clear about. The question makes it clear what problems need to be addressed, and the examiners answer is very good (although as is always the case, his answer is deliberately much longer than what is expected from students attempting the exam).
You will obviously have seen that 4 or 5 marks were for discussion of the issues, and that 5 or 6 marks were for discussing how the issues may be addressed.
I am.not clear with what exactly the issue is which is being addressed is it related to cheaper products made at dunia or the teenage employees working there how are they being affected if talam decides to mske cheaper drones in dunia
The question is expecting you to address the two issues together.
The first paragraph of the question says that potential customers has said that the price is too high (which will affect their sales). The second paragraph says that if they reduce the price then they will not be profitable, unless they move production to Dunia.
So these are the sustainability issues.
However, the final paragraph says that companies they deal with in Dunia employ young teenage children. Using more products from Dunia may possibly mean bad publicity because of this, and this is an ethical issue.
And also i cannot understand this point using more products from.dunia may possibly mean bad publicity how come ?
Sustainable is keeping the business profitable.
Bad publicity could arise because of them dealing with companies employing young teenage children.
- The topic ‘Talam Co (Jun 2019)’ is closed to new replies.