Financing Structure Of Aapl, Rimm & Csr
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Apple Inc. (NASDAQ: AAPL)
Financial Information from Annual Report (millions)
Financing Policy
Current Assets
$
34,690
Current Assets > Current Liabilities (34,690 > 14,092)
Cash & Cash Equivalents
$
11,875
NCA < NCL + Equity (4,882 < 4450 + 21030)
Marketable Securities
$
12,615
Short Term Liquidity
Account Receivables
$
2,422
Current Ratio = 34,690 / 14,092 = 2.46 Quick Ratio = 26,912 / 14,092 = 1.91
Non-Current Assets
$
4,882
Current Liabilities
$
14,092
Leverage
Non-Current Liabilities
$
4,450
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100 =
Shareholders Equity
$
21,030
Source: Apple - Annual Report 2008 (pg 54)
➥ 4450 / 20,598 = 21% Debt to Asset = Total Liabilities / Total Assets ➥ 18,542 / 39,572 = 46.9% Debt to Equity = Total Liabilities / Shareholders Equity ➥ 18,542 / 21,030 = 88.2% Given the above calculations, Apple have adopted a defensive financing position. Although, equity financing is generally more expensive than debt financing, a greater proportion of equity provides a cushion and is seen as a measure of financial strength1. Apple is in a healthy position in terms of liquidity. Both Current and quick ratios indicate that they can easily pay their short term debt obligations without needing additional financing. Apple’s success over the past six years has enabled them to accumulate $24.49 billion in cash, cash equivalents and short term investments as of 2008; a 59% increase YOY. Upon further analysis, short term investments increased 109% YOY to $12.615 billion; representing the main driver behind their defensive financing position. In particular, Apple’s investments in US Treasury and Agency Securities increased from 1.028 million to 9.934 billion in 2008 (pg 65). As US Treasury Securities are backed by the full faith and credit of the U.S. Government, they are generally seen to be risk free. However, Agency securities are not, and hence carry additional risk. In summary, Apple has decided to invest the majority of it’s 2007 retained earnings in low risk investments. This may be a reflection of the volatility of the markets during this economic crisis. Despite Apple having a relatively high Debt to Equity Ratio, Apple has zero debt (no loans). This has been the case since 2004. Their total liabilities consists entirely of accounts payable and accrued expenses. In reflection of this, their payables payment period is 94 days. Apple’s market dominance has enabled them to demand very attractive payment terms from their component suppliers. Although some investors have criticised Apple for “not doing anything” with the $24.49 billion in cash, cash equivalents and short term investments, I believe their defensive strategy is well chosen. Apple has positioned itself to take advantage of any acquisition opportunities that may offer long term strategic advantages. For example, the acquisition of P.A Semiconductors $268 million in 2008 has offered Apple a significant strategic advantage in the mobile communications industry. During an economic downturn, that level of cash creates "extraordinary opportunities," according to CEO Steve Jobs.
1
Investopedia, Gearing Ratio, 21 June 2009, http://www.investopedia.com/terms/g/gearingratio.asp
Mark Regan - MIB 5 - 090291
1
Research in Motion Ltd. (NASDAQ: RIMM)
Financial Information from Annual Report (millions)
Current Assets
$
4,841.59
Cash & Cash Equivalents
$
835.55
Marketable Securities
$
682.67
Account Receivables
$
2,269.85
Non-Current Assets
$
3,259.79
Current Ratio = (4,842 / 2,115) = 2.29
Current Liabilities
$
2,115.35
Quick Ratio = 3,789 / 2,115 = 1.79
Non-Current Liabilities
$
111.89
Shareholders Equity
$
5,874.13
Financing Policy Current Assets > Current Liabilities (4,842 > 2,115) NCA < NCL + Equity (3,260 < 112 + 5,874)
Short Term Liquidity
Leverage
Source: RIMM - Annual Report 2009 (pg 49)
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100
Fig1: Debt to Equity (2005 - 2008)
➥ [(111,893 / 2,726,235)]*100 = 4.1% Debt to Asset = Total Liabilities / Total Assets
100%
➥ 2,227,244 / 8,101,372 = 27.5%
80%
Debt to Equity = Total Liabilities / Shareholders
60%
Equity
40%
➥ 2,227,244 / 5,874,128 = 37.9%
20%
Similar to Apple, Research in Motion (RIMM) have adopted a defensive financing position. Both their current and quick ratios are inline with Apple’s; reflecting their ability to pay their short term obligations without the need for additional financing. One notable difference between RIMM and AAPL is the
0%
2005
2008
RIMM
AAPL
Historical data provided by www.allfactors.com. Graph created by Mark Regan
gearing ratios. RIMM leverages very little debt financing in comparison to AAPL. As debt financing is generally cheaper than equity financing, RIMM should consider leveraging more debt financing as it would lower their WACC. Fig 1 illustrates how RIMM has been leveraging more debt financing since 2003. However, RIMM leverages considerably less debt financing compared to Apple (AAPL). In contrast to AAPL, RIMM had long term debt of 7.259 million in 2008. However, RIMM paid off all long term debt obligations in 2009 (Annual Report, pg 49). During periods of economic uncertainty, maintaining a debt free balance sheet is a good survival tactic. The company has a $100 million revolving credit facility, of which it has utilised only $6.5 million. RIMM use this facility to “support and secure operating and financing requirements”. The excess credit facility will offer RIMM a reasonable amount of cushioning in the event of liquidity issues. (Annual Report 2009, pg 43)
Mark Regan - MIB 5 - 090291
2
CSR Plc: Financing Structure
Financial Information from Annual Report (millions)
Financing Policy
Current Assets
GBP
409.91
Current Assets > Current Liabilities (409.91 > 102.1)
Cash & Cash Equivalents
GBP
180.90
NCA < NCL + Equity (181.77 < 22.84 + 466.75)
Marketable Securities
GBP
81.00
Short Term Liquidity
Account Receivables
GBP
81.81
Non-Current Assets
GBP
181.77
Current Liabilities
GBP
102.10
Non-Current Liabilities
GBP
22.84
Shareholders Equity
GBP
466.75
Current Ratio = (409.91 / 102.10) = 4.01 Quick Ratio = (Cash + Marketable Securities + Accounts Receivables) / Current Liabilities ➥ 343.71 / 102.10 = 3.37
Leverage
Source: CSR - Annual Report 2009 (pg 65)
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100
Fig 2: Leverage Comparison
➥ (22.84 / 307.81)*100 = 7.42% Gearing
Debt to Asset = Total Liabilities / Total Assets ➥ 124.94 / 591.68 = 21.12%
Debt to Assets
Debt to Equity = Total Liabilities /
Debt to Equity
Shareholders Equity 0%
➥ 124.94 / 466.75 = 26.77%
20%
40%
CSR
Similar to AAPL and RIMM, CSR has adopted a defensive financing position. More impressively, CSR has excellent liquidity
60%
80%
RIMM
100%
AAPL
Fig 3: Liquidity Comparison
with Current and Quick ratios of 4.01 and 3.37 respectively. 2009 has been a particularly difficult year for CSR with profit
Current Ratio
before tax falling from £150 million to negative 6.5 million. Fortunately, CSR have
Quick Ratio
generated a sizeable balance of cash, cash equivalents and short term investments in recent years. Their strong balance sheet and good liquidity enabled them to survive the past year. Fig 2 & Fig 3 clearly illustrate the leveraging and liquidity
0
1
2
CSR
3
RIMM
4
5
AAPL
Historical data provided by www.allfactors.com. Graphs created by Mark Regan
differences between AAPL, RIMM and CSR. Apple is leveraging far more debt financing in comparison to both RIMM and CSR. This is mainly due to Apple’s long payables payment period of 94 days. CSR have a policy of leasing some of its equipment under finance leases and purchase certain software licences under agreements containing deferred payment terms. The average lease term is 2.0 years and interest rates are fixed at the contract date. Current lease obligations have a present value of $1.35 million, however it is denominated in Sterling. All other obligations are denominated in US dollars. (Annual Report, pg 87)
Mark Regan - MIB 5 - 090291
3
Question 2: Estimate the WACC of CSR plc.
Market Value of Equity = No. Of Shares Outstanding x Share Price
➥ 449.4 million Source: According to Google Finance: http://www.google.com/finance?q=LON%3ACSR (21st June 2009) Market Value of Debt = Assets - Equity
➥ 591.681 - 449.4 = 142.281 million Source: Annual Report 2009, pg 65 CAPM: Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return)
Risk Free Rate of Return: According to Motley Fool, the Risk free rate of return in the UK is the interest rate you get on gilts. The UK benchmark of gilt yields can be found on the Financial Times web site. Given that the project is due to last 7 years, a 7 year guilt yields 2.79%. ➥ Risk Free Rate of Return = 2.79% Source: http://markets.ft.com/markets/bonds.asp (21st June 2009) Calculating the β value: The β value of CSR can be found on Reuters.com ➥ β = 1.49 Source: http://www.reuters.com/finance/stocks/overview?symbol=CSR.L (21st June 2009) Market Return: Due to the recent economic crisis, stocks around the world have been significantly devalued. In order to measure market return, we must chose a period in time that fairly reflects the markets average return. I have chosen to analyze the FTSE 100 between the dates of the 19th June 1989 and the 19th of June 2007 we calculate the market return to be:
➥ Market Return = (6650.2 / 2154.7)1/18 - 1 = 6.46% Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return) ➥ Cost of Equity = 5.6% + (1.49) x (6.46% - 2.79%) = 11.07% Cost of Debt = Borrowings / Interest
Present Value of lease obligations = 1350 Interest Expenses = 286 ➥ Cost of Debt = 1350 / 286 = 4.72% Source: Annual Report 2009: pg 79 & 86 Effective Corporation Tax
➥ Corporation Tax = 28.5% Source: Annual Report: pg 80 Calculate Weighted Average Cost of Capital
WACC = [449.4 / (449.4 + 142.281)] x (11.07%) + [142.281 / (449.4 + 142.281)] x (4.72%) x (1 - 0.285) ➥ WACC = 8.41% + 0.81% = 9.22% Mark Regan - MIB 5 - 090291
4
Question 3: Calculate te NPV of this project, using the WACC calculated for CSR plc in the previous example. (In millions unless otherwise stated) Table 2: Calculate Net Present Value of Project Year:
0
1
2
3
4
5
6
Plant Cost
(900.00)
10.77
Working Capital
(160.00)
172.37
Adjusted Cashflow due to Inflation
203.00
Tax Tax Savings from Depreciation Allowance
45.00
288.46
418.27
594.36
323.19
(40.60)
(57.69)
(83.65)
(118.87)
(64.64)
33.75
25.31
18.98
14.24
40.53
Net Cashflow
(1,060.00) 248.00
281.61
385.89
529.69
401.69
(24.11)
Discount Factor
1.0000
0.9156
0.8383
0.7675
0.7027
0.6434
0.5891
Discounted Final Cashflow
(1,060.00) 227.06
236.07
296.18
372.23
258.45
(14.20)
NPV
315.80
WACC used in calculations:
9.22%
Conclusion
Given that the project has a positive net present value of 315.80 million, I recommend that the project should go ahead.
Table 1: Tax Saving from Depreciation Allowance Year
Plant NBV
Depreciation
Tax Savings
Allowance
0
900.00
Explanation of calculations:
1
675.00
225.00
45.00
Working capital is affected by inflation and is hence equal to 172.37 million in year 5.
2
506.25
168.75
33.75
3
379.69
126.56
25.31
Adjusted Cashflow takes into consideration the effect
4
284.77
94.92
18.98
of inflation. ➥ Year 4 Cashflow = 560*(1+0.015)4 = 594.36
5
213.57
71.19
14.24
6
10.93
202.64
40.53
Tax is calculated as 20% of adjusted cashflow and is offset by one year. ➥ Year 4 Tax = 0.2*418.27 = 83.65 Tax Allowance is calculated as 20% of depreciation allowance. Plant is sold as scrap in year 6 for a NRV of 10.93, hence a loss of 202.64 is made on the sale. Tax authorities give a depreciation allowance on the full loss value of the asset. ➥ Year 4 Tax Savings from Depreciation Allowance = 0.2 x 0.25 x 379.69 = 18.98 ➥ Year 6 Tax Savings from Depreciation Allowance = 0.2 x (213.57 - 10.93) = 40.53 Discount Factor is found using Present Value Interest Factor Tables ➥ Year 4 Interest Factor =1 / (1 + 0.06038)4 = 0.7910
Mark Regan - MIB 5 - 090291
5
Financial Information from Annual Report (millions)
Financing Policy
Current Assets
$
34,690
Current Assets > Current Liabilities (34,690 > 14,092)
Cash & Cash Equivalents
$
11,875
NCA < NCL + Equity (4,882 < 4450 + 21030)
Marketable Securities
$
12,615
Short Term Liquidity
Account Receivables
$
2,422
Current Ratio = 34,690 / 14,092 = 2.46 Quick Ratio = 26,912 / 14,092 = 1.91
Non-Current Assets
$
4,882
Current Liabilities
$
14,092
Leverage
Non-Current Liabilities
$
4,450
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100 =
Shareholders Equity
$
21,030
Source: Apple - Annual Report 2008 (pg 54)
➥ 4450 / 20,598 = 21% Debt to Asset = Total Liabilities / Total Assets ➥ 18,542 / 39,572 = 46.9% Debt to Equity = Total Liabilities / Shareholders Equity ➥ 18,542 / 21,030 = 88.2% Given the above calculations, Apple have adopted a defensive financing position. Although, equity financing is generally more expensive than debt financing, a greater proportion of equity provides a cushion and is seen as a measure of financial strength1. Apple is in a healthy position in terms of liquidity. Both Current and quick ratios indicate that they can easily pay their short term debt obligations without needing additional financing. Apple’s success over the past six years has enabled them to accumulate $24.49 billion in cash, cash equivalents and short term investments as of 2008; a 59% increase YOY. Upon further analysis, short term investments increased 109% YOY to $12.615 billion; representing the main driver behind their defensive financing position. In particular, Apple’s investments in US Treasury and Agency Securities increased from 1.028 million to 9.934 billion in 2008 (pg 65). As US Treasury Securities are backed by the full faith and credit of the U.S. Government, they are generally seen to be risk free. However, Agency securities are not, and hence carry additional risk. In summary, Apple has decided to invest the majority of it’s 2007 retained earnings in low risk investments. This may be a reflection of the volatility of the markets during this economic crisis. Despite Apple having a relatively high Debt to Equity Ratio, Apple has zero debt (no loans). This has been the case since 2004. Their total liabilities consists entirely of accounts payable and accrued expenses. In reflection of this, their payables payment period is 94 days. Apple’s market dominance has enabled them to demand very attractive payment terms from their component suppliers. Although some investors have criticised Apple for “not doing anything” with the $24.49 billion in cash, cash equivalents and short term investments, I believe their defensive strategy is well chosen. Apple has positioned itself to take advantage of any acquisition opportunities that may offer long term strategic advantages. For example, the acquisition of P.A Semiconductors $268 million in 2008 has offered Apple a significant strategic advantage in the mobile communications industry. During an economic downturn, that level of cash creates "extraordinary opportunities," according to CEO Steve Jobs.
1
Investopedia, Gearing Ratio, 21 June 2009, http://www.investopedia.com/terms/g/gearingratio.asp
Mark Regan - MIB 5 - 090291
1
Research in Motion Ltd. (NASDAQ: RIMM)
Financial Information from Annual Report (millions)
Current Assets
$
4,841.59
Cash & Cash Equivalents
$
835.55
Marketable Securities
$
682.67
Account Receivables
$
2,269.85
Non-Current Assets
$
3,259.79
Current Ratio = (4,842 / 2,115) = 2.29
Current Liabilities
$
2,115.35
Quick Ratio = 3,789 / 2,115 = 1.79
Non-Current Liabilities
$
111.89
Shareholders Equity
$
5,874.13
Financing Policy Current Assets > Current Liabilities (4,842 > 2,115) NCA < NCL + Equity (3,260 < 112 + 5,874)
Short Term Liquidity
Leverage
Source: RIMM - Annual Report 2009 (pg 49)
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100
Fig1: Debt to Equity (2005 - 2008)
➥ [(111,893 / 2,726,235)]*100 = 4.1% Debt to Asset = Total Liabilities / Total Assets
100%
➥ 2,227,244 / 8,101,372 = 27.5%
80%
Debt to Equity = Total Liabilities / Shareholders
60%
Equity
40%
➥ 2,227,244 / 5,874,128 = 37.9%
20%
Similar to Apple, Research in Motion (RIMM) have adopted a defensive financing position. Both their current and quick ratios are inline with Apple’s; reflecting their ability to pay their short term obligations without the need for additional financing. One notable difference between RIMM and AAPL is the
0%
2005
2008
RIMM
AAPL
Historical data provided by www.allfactors.com. Graph created by Mark Regan
gearing ratios. RIMM leverages very little debt financing in comparison to AAPL. As debt financing is generally cheaper than equity financing, RIMM should consider leveraging more debt financing as it would lower their WACC. Fig 1 illustrates how RIMM has been leveraging more debt financing since 2003. However, RIMM leverages considerably less debt financing compared to Apple (AAPL). In contrast to AAPL, RIMM had long term debt of 7.259 million in 2008. However, RIMM paid off all long term debt obligations in 2009 (Annual Report, pg 49). During periods of economic uncertainty, maintaining a debt free balance sheet is a good survival tactic. The company has a $100 million revolving credit facility, of which it has utilised only $6.5 million. RIMM use this facility to “support and secure operating and financing requirements”. The excess credit facility will offer RIMM a reasonable amount of cushioning in the event of liquidity issues. (Annual Report 2009, pg 43)
Mark Regan - MIB 5 - 090291
2
CSR Plc: Financing Structure
Financial Information from Annual Report (millions)
Financing Policy
Current Assets
GBP
409.91
Current Assets > Current Liabilities (409.91 > 102.1)
Cash & Cash Equivalents
GBP
180.90
NCA < NCL + Equity (181.77 < 22.84 + 466.75)
Marketable Securities
GBP
81.00
Short Term Liquidity
Account Receivables
GBP
81.81
Non-Current Assets
GBP
181.77
Current Liabilities
GBP
102.10
Non-Current Liabilities
GBP
22.84
Shareholders Equity
GBP
466.75
Current Ratio = (409.91 / 102.10) = 4.01 Quick Ratio = (Cash + Marketable Securities + Accounts Receivables) / Current Liabilities ➥ 343.71 / 102.10 = 3.37
Leverage
Source: CSR - Annual Report 2009 (pg 65)
Gearing Ratio (%) = (Non-Current Liabilities / Capital Employed)*100
Fig 2: Leverage Comparison
➥ (22.84 / 307.81)*100 = 7.42% Gearing
Debt to Asset = Total Liabilities / Total Assets ➥ 124.94 / 591.68 = 21.12%
Debt to Assets
Debt to Equity = Total Liabilities /
Debt to Equity
Shareholders Equity 0%
➥ 124.94 / 466.75 = 26.77%
20%
40%
CSR
Similar to AAPL and RIMM, CSR has adopted a defensive financing position. More impressively, CSR has excellent liquidity
60%
80%
RIMM
100%
AAPL
Fig 3: Liquidity Comparison
with Current and Quick ratios of 4.01 and 3.37 respectively. 2009 has been a particularly difficult year for CSR with profit
Current Ratio
before tax falling from £150 million to negative 6.5 million. Fortunately, CSR have
Quick Ratio
generated a sizeable balance of cash, cash equivalents and short term investments in recent years. Their strong balance sheet and good liquidity enabled them to survive the past year. Fig 2 & Fig 3 clearly illustrate the leveraging and liquidity
0
1
2
CSR
3
RIMM
4
5
AAPL
Historical data provided by www.allfactors.com. Graphs created by Mark Regan
differences between AAPL, RIMM and CSR. Apple is leveraging far more debt financing in comparison to both RIMM and CSR. This is mainly due to Apple’s long payables payment period of 94 days. CSR have a policy of leasing some of its equipment under finance leases and purchase certain software licences under agreements containing deferred payment terms. The average lease term is 2.0 years and interest rates are fixed at the contract date. Current lease obligations have a present value of $1.35 million, however it is denominated in Sterling. All other obligations are denominated in US dollars. (Annual Report, pg 87)
Mark Regan - MIB 5 - 090291
3
Question 2: Estimate the WACC of CSR plc.
Market Value of Equity = No. Of Shares Outstanding x Share Price
➥ 449.4 million Source: According to Google Finance: http://www.google.com/finance?q=LON%3ACSR (21st June 2009) Market Value of Debt = Assets - Equity
➥ 591.681 - 449.4 = 142.281 million Source: Annual Report 2009, pg 65 CAPM: Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return)
Risk Free Rate of Return: According to Motley Fool, the Risk free rate of return in the UK is the interest rate you get on gilts. The UK benchmark of gilt yields can be found on the Financial Times web site. Given that the project is due to last 7 years, a 7 year guilt yields 2.79%. ➥ Risk Free Rate of Return = 2.79% Source: http://markets.ft.com/markets/bonds.asp (21st June 2009) Calculating the β value: The β value of CSR can be found on Reuters.com ➥ β = 1.49 Source: http://www.reuters.com/finance/stocks/overview?symbol=CSR.L (21st June 2009) Market Return: Due to the recent economic crisis, stocks around the world have been significantly devalued. In order to measure market return, we must chose a period in time that fairly reflects the markets average return. I have chosen to analyze the FTSE 100 between the dates of the 19th June 1989 and the 19th of June 2007 we calculate the market return to be:
➥ Market Return = (6650.2 / 2154.7)1/18 - 1 = 6.46% Cost of Equity = Risk Free Rate of Return + β*(Market Return - Risk Free Rate of Return) ➥ Cost of Equity = 5.6% + (1.49) x (6.46% - 2.79%) = 11.07% Cost of Debt = Borrowings / Interest
Present Value of lease obligations = 1350 Interest Expenses = 286 ➥ Cost of Debt = 1350 / 286 = 4.72% Source: Annual Report 2009: pg 79 & 86 Effective Corporation Tax
➥ Corporation Tax = 28.5% Source: Annual Report: pg 80 Calculate Weighted Average Cost of Capital
WACC = [449.4 / (449.4 + 142.281)] x (11.07%) + [142.281 / (449.4 + 142.281)] x (4.72%) x (1 - 0.285) ➥ WACC = 8.41% + 0.81% = 9.22% Mark Regan - MIB 5 - 090291
4
Question 3: Calculate te NPV of this project, using the WACC calculated for CSR plc in the previous example. (In millions unless otherwise stated) Table 2: Calculate Net Present Value of Project Year:
0
1
2
3
4
5
6
Plant Cost
(900.00)
10.77
Working Capital
(160.00)
172.37
Adjusted Cashflow due to Inflation
203.00
Tax Tax Savings from Depreciation Allowance
45.00
288.46
418.27
594.36
323.19
(40.60)
(57.69)
(83.65)
(118.87)
(64.64)
33.75
25.31
18.98
14.24
40.53
Net Cashflow
(1,060.00) 248.00
281.61
385.89
529.69
401.69
(24.11)
Discount Factor
1.0000
0.9156
0.8383
0.7675
0.7027
0.6434
0.5891
Discounted Final Cashflow
(1,060.00) 227.06
236.07
296.18
372.23
258.45
(14.20)
NPV
315.80
WACC used in calculations:
9.22%
Conclusion
Given that the project has a positive net present value of 315.80 million, I recommend that the project should go ahead.
Table 1: Tax Saving from Depreciation Allowance Year
Plant NBV
Depreciation
Tax Savings
Allowance
0
900.00
Explanation of calculations:
1
675.00
225.00
45.00
Working capital is affected by inflation and is hence equal to 172.37 million in year 5.
2
506.25
168.75
33.75
3
379.69
126.56
25.31
Adjusted Cashflow takes into consideration the effect
4
284.77
94.92
18.98
of inflation. ➥ Year 4 Cashflow = 560*(1+0.015)4 = 594.36
5
213.57
71.19
14.24
6
10.93
202.64
40.53
Tax is calculated as 20% of adjusted cashflow and is offset by one year. ➥ Year 4 Tax = 0.2*418.27 = 83.65 Tax Allowance is calculated as 20% of depreciation allowance. Plant is sold as scrap in year 6 for a NRV of 10.93, hence a loss of 202.64 is made on the sale. Tax authorities give a depreciation allowance on the full loss value of the asset. ➥ Year 4 Tax Savings from Depreciation Allowance = 0.2 x 0.25 x 379.69 = 18.98 ➥ Year 6 Tax Savings from Depreciation Allowance = 0.2 x (213.57 - 10.93) = 40.53 Discount Factor is found using Present Value Interest Factor Tables ➥ Year 4 Interest Factor =1 / (1 + 0.06038)4 = 0.7910
Mark Regan - MIB 5 - 090291
5
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