Skip to content

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

Delmar Ltd obtains a subsidised loan of $2 million for four years, interest-only, at 3% a year, when its normal market borrowing rate is 6%. The tax rate is 25%. Using the market pre-tax rate of 6% as the discount rate, and a four-year annuity factor at 6% of 3.465, what is the PV of the benefit of the subsidy after tax?

The PV of the after-tax subsidy benefit is $155,925. The 3% rate saving on $2m is $60,000 a year, which is $45,000 after 25% tax, and this is discounted at 6% over four years using the 3.465 annuity factor.

  1. A$155,925Correct
  2. B$207,900
  3. C$180,000
  4. D$51,975

Explanation

Annual interest saving = $2m × (6% - 3%) = $60,000. After tax this is $60,000 × 75% = $45,000. PV = $45,000 × 3.465 = $155,925. $207,900 ignores tax. $180,000 does not discount. $51,975 uses only the 25% tax amount on the saving.

Did you get it right without looking?

One question tells you little. A timed set on Impact of financing on investment decisions and adjusted present values shows your real accuracy, how long you take and where you lose marks.

Practise Impact of financing on investment decisions and adjusted present valuesFree diagnostic mock

More Impact of financing on investment decisions and adjusted present values questions