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ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values

A project has a base-case NPV of +$50,000. Its financing will create a PV of interest tax shields of $30,000. The project needs $480,000 of new funds raised from a share issue, and issue costs are 4% of gross proceeds (so the net amount raised is $480,000). Issue costs are not tax deductible. What is the APV?

The APV is +$60,000. Issue costs are 4% of gross proceeds, so gross funds are $500,000 and costs are $20,000. Adding the $30,000 tax shield PV to the $50,000 base NPV and deducting the $20,000 issue costs gives $60,000.

  1. A+$60,000Correct
  2. B+$60,800
  3. C+$80,000
  4. D$0

Explanation

Gross proceeds = 480,000 / 0.96 = 500,000, so issue costs = 20,000. APV = 50,000 + 30,000 − 20,000 = 60,000. Calculating 4% on the net $480,000 gives $19,200 and an APV of $60,800, which uses the wrong base.

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