Question 1i
Examiners Report

This question involved a company considering an international investment and required candidates to consider relevant cash flows, opportunity costs, inflation, exchange rates, adjusted present values, and financing side effects. It was essential that a structured approach was taken when answering the first and main part of the question.

The second and smaller part of the question asked candidates to consider other factors, including the possibility of a change in government and its implications on the company, before the final decision was taken. Some good responses considered this part before the first part and gained high marks.

On the whole, good answers inflated the cash flows correctly, calculated the taxation impact and converted the Gamalan cash flows into dollars just prior to calculating the present values. Although not many candidates got all the other relevant cash flows correct, the better answers made a good attempt at calculating these. Effective use of appendices and workings added to clarity. Many answers made a good attempt at the initial calculations.

Poor responses attempted to convert cash flows into dollars too soon and/or attempted to calculate the weighted average cost of capital, which is not correct for an APV computation. This approach led to unnecessary errors and also took a lot more time. Errors were also made in calculating inflation, additional contribution, tax shields and subsidy benefits.

We use cookies to help make our website better. We'll assume you're OK with this if you continue. You can change your Cookie Settings any time.

Cookie SettingsAccept