tramont co december 11

The answer has included tax allowable depreciation!! See workings (5) of the examiners answer and there it is. It creates a tax loss and so the loss is carried forward against future profits. I said that it is always the equity beta that determines the return required by equity, and that is the case in this question as well. The question specifically asks for the APV approach in which case you discount at the cost of equity as if all equity financed. If we are all equity financed then the equity beta is equal to the asset beta!

Thank you sir.I m happy with your second reply. But in first query i did look at working 5,but please tell me if we do this depreciation in main solutiin rather than working, will it be wrong or because its cash flow thats why we r not puting depreciation here thanks.

We never show depreciation itself because it is not a cash flow. It is relevant for the calculation of the tax, but where in your workings you show the tax effect does not matter (as long as, as always, it is clear to the marker what you are doing).

Thank you sir.

You are welcome :-)