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1. Does it matter whether we include tax allowed depreciation in the npv calculation or just show it as working when calculating taxation? In some questions I saw they just included it in the workings while in others the proforma had the TAD.
2. Why did we not add tax allowable depreciation after calculation of taxable profits?!
3. Why did we Include additional contribution from component in APV calculation but not in NPV calculation ?
4. Why did we not use 10% as cost of capital while calculating APV?
5. Why did we not include closure revenue and costs in NPV?!
4 first. The base case NPV has been calculated at 10%. Not because it is the cost of capital – it isn’t – but because it is the cost of equity if the project were all equity financed. The question specifically says to do this, and that is what we always do in APV calculations.
3. The components are a cost in Gamala (and as such are included in the cash flows for the base case NPV). They are also revenue to Tramont and so are dealt with separately by discounting at the rate appropriate to their risk (as dictated by the requirements in the question).
5. It would not make any difference to the end result if they had been included in the base case NPV – there is a net 600 saved ‘now’ and the PV of 600 now is always 600!
Dear Sir,
Regarding the closure revenue and cost, I found that the answer did not take into account of tax (30%). Is there any reason for it?It is an assumption that there is no tax effect (just as in real life, you need to make assumptions in Paper AFM). As always (and as I say in my free lectures) state your assumption and you will get the marks (even though your final answer may be different from that of the examiners.)
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