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1)In the NPV calculation,it says that capex in yr 0 is 150m and 50m in yr1,then why do we take the amounts of 127.5 and 36.88 from the question?
2)Why hasnt the answer included the yrly effect of the tax savings on the capex and in calculating the sensitivity of the project from a change in initial capex,what has bpp done?
Thanks in advance
1) The question says immediately above the table of cash flows that they are post-tax cash flows including the estimated tax benefit of capital allowances!!! (And you can check it – although it would be wasting time – 50% first year allowance on 150 is 75. The tax saving on 75 is 75 x 30% = 22.5. So the post-tax cash flow is 150 – 22.5 = 127.5)
2) Because of (1), the answer has included the tax savings on the capital expenditure!!
(Don’t ask me what BPP has done – I do not work for BPP and I do not have their books! However they will obviously have done the same as the examiners own suggested solution)
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