Comment on the APV Model

Comments on the Results

Comments on the General Calculation Process

Correction to the Results

?        Corrections to the Investment Side (NPV)

?        Correction to the Financing Side

Comments on the Results of the Investment

The Project should be accepted.

Financing the project entirely by debt would add just under $1.78 million to the value of the project, or approximately, an additional 20% to the all-equity financed project.

The adjusted present value (APV) of the project is just under $10.4 million and therefore it should be accepted.

Comments on the General Calculation Process

Step 1:

?        calculate the base case NPV as if ungeared using an asset beta or using the M&M formula for k_eⁱ)

?        The value of the project is initially assessed considering only the business risk involved in undertaking the project.

Step 2:

?        add the PV of the tax saved as a result of the debt & benefit of subsidy (use Kd)

?        The impact of debt financing and the subsidy benefit are then considered.

Step 3:

?         Subtract the cost of issuing new finance

Corrections to the Investing Side (NPV)

?        Capital allowances need to be taken away from profit estimates before tax is calculated.

?        Interest should be excluded from the net present value calculations.

?        Different cash flows should be subject to different rates of inflation.

?        The impact of the working capital requirement is included in the estimate as, although all the working capital is recovered at the end of the project.

Correction to the Financing Side

?        The net interest savings due to the subsidy, should be discounted at the normal pre-tax Kd.

?        The tax saving should be discounted at the normal pre-tax Kd.

Assumptions of the APV Model

?        It is assumed that all figures used are accurate and any estimates made are reasonable.

?        It is assumed that XX’s asset beta and all-equity financed discount rate represent the business risk of the project.

?        It is assumed that the initial working capital required will form part of the funds borrowed but that the subsequent working capital requirements will be available from the funds generated by the project.

?        ...

Assumptions of the APV Model(解析)

Assumption：

?        It is assumed that all figures used are accurate and any estimates made are reasonable.

?        Respond：

?        XX may want to consider undertaking a sensitivity analysis to assess this.