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751 PV (150,000) 52,995 51,045 49,195 NPV ¼ 3,235 59 ————————————————————————————————————————— Investment Appraisal KK Taxation can have a major impact on project viability. Tax is paid on profits at a rate of 50% in the year the profits are earned and 50% in the following year. Tax charged on net cash flows will reduce the NPV Tax relief given on assets purchased – in the form of Writing Down Allowances (WDAs) – will improve the NPV K KK Writing Down Allowances Are expressed as a percentage – usually 25% Are applied to the asset cost on a reducing balance basis Are given in full for every year that the company owns the asset (even when owned for only one day of the accounting period) K NPV – Incorporating the effect of taxation K Inflation and the cost of capital Are not given in year of sale – instead, a balancing allowance or charge is given – this ensures total allowances equal total fall in value The allowance is set against company profits to reduce liability to corporation tax.

1. 2. Calculate the net cash flows for the project Recalculate the net cash flows if the asset were bought a day later at the start of an accounting period.

4 £5,000 £2,000 EV £47,000 A company has a choice of two strategies for its product launch. Results will depend on the level of demand, which may be high (60% chance) or low. Strategy A will earn £45,000 (high demand) or £20,000 (low demand). Strategy B will earn £75,000 or £5,000. The problem can be shown on a decision tree. Strategy B has the highest EV and should be adopted. 44 ————————————————————————————————————————— –––––––––––––––––––––––––––––––––––––––––– Risk and Uncertainty Decision trees Other factors to consider 1.

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