A NEW WAY OF AUDITING – AUDIT IN KNOWLEADGE BASED ...

Annals of the University “Constantin Brâncuşi”of Tg-Jiu, No. 1/2008, Volume 3,
ISSN: 1842-4856
ANPV applies only if the amount of the debt is known for the entire life span of the
project, and NPVWACC if the debt rate (the D/C relation) is the same for the entire life span of
the project.
The cash flow meant for the stock-holders method is very different from the other two
methods. It compares the cash flows meant for the stock holders, after the deduction of the
expenses with the interest rates of the loaned capital with the part of the value of the
investment project financed by the firm’s stock-holders. This method also applies when the
debt rate is constant for the entire period of exploiting the project.
As an example we consider an investment project of 10 million lei, with an exploitation
period of 5 years. The depreciation is determined according to the linear system, and is of 2
million lei per year. From the exploitation result annual gross profits (EBE) of 3 million lei,
and the tax on profit rate is of 16%. The risk-free profitability rate for the treasury certificates
issued by the state is of 10%, and the cost of equity for projects of the same risk, in the
hypothesis of zero debt, is of 15%.
1. The method of the adjusted net present value (ANPV)
a) the projection of the cash-flows is presented in the following chart:
Flows No N1 N2 N3 N4 N5
I - 10
TxA 0,16x2 = 0,32 0,32 0,32 0,32 0,32 0,32
EBE(1-T) 3(1-0,16)= 2,52 2,52 2,52 2,52 2,52 2,52
b) The net present value in the hypothesis of zero debt is (tax economy related to the
deductibility of the depreciation is present with the interest rate of the risk-free asset, being a
non-risk component):
5 0,
32 5 2,
52
NPV = ∑ + ∑ −10=0,32
x 3,7908 + 2,52 x 3,3522 - 10=
i = 1(
1+
0,
10)
i
i = 1(
1+
0,
15)
i
= 1,2 + 8,45 – 10 = - 0,35 million lei
As NPV is smaller than zero, the project must be rejected. Still, the effect of debt on the
investment project has not been considered.
c) If the firm gets a loan by issuance of bonds for the amount of 6,06 million lei, with an
interest of 10% per year, for a period of 5 years and a placement commission of 1%, the
issuance expenses are of 0,06 million lei. Per year, the net cost of the issuance expenses is
determined in the following way:
Expenses No N1 N2 N3 N4 N5
Issuance costs 0,06
Amortizing the 0,06/5 = 0,012 0,012 0,012 0,012 0,012 0,012
issuance costs
Tax economy 0,16x0,012 0,002 0,002 0,002 0,002 0,002
= 0,002
The present tax economy will be:
5 1
0,002 x ∑ = 0,002 x 3,7908= 0,008 million lei
i = 1 ( 1 + 0 1, ) i
The present value considering the issuance costs is equal to:
- 0,35 + 0,008 = - 0,342million lei
d) The tax economy related to the deductibility of the interests will be:
Elements No N1 N2 N3 N4 N5
Gross value of the
loan
6,06
Paid interests - 10%x6,06=0,606 0,606 0,606 0,606 0,606
32