Question 2 - Set up

In this lesson

1. 0:00 AFM specimen paper debrief introduction
2. 0:16 Understanding the investment evaluation requirements
3. 1:29 Project background and market opportunity
4. 2:19 Cash flow structure and financial data
5. 3:40 Intercompany transactions and transfer pricing
6. 4:31 Inflation rates and exchange rate adjustments
7. 5:31 Tax considerations and loss carry-forward rules
8. 6:23 Discount rate and country risk premium
9. 7:16 Planning the foreign investment NPV calculation
10. 9:50 Evaluating the chief executive's discount rate adjustment

About this lesson

The question requires you to evaluate an investment proposal in Canva (using the lira currency) for a eurozone-based company, incorporating country risk premiums, inflation adjustments, and exchange rate movements into your NPV analysis. You'll discover the key technical considerations that make this question more complex than a standard NPV calculation. These include handling intercompany cash flows from component transfers between the parent company and subsidiary, managing loss carryforwards under the local tax regime, accounting for inflation rates that differ between the eurozone and Canva to adjust exchange rates over the four-year project period, and calculating the tax shield on capital allowances. The video walks you through identifying which elements of the exhibits are relevant cash flows and which are supporting information. The question also requires you to evaluate the chief executive's justification for adjusting the discount rate from 13% to 16% to reflect country risk. You'll explore whether factors like political instability, government changes, foreign exchange volatility, and economic uncertainty genuinely warrant this adjustment, then present your findings clearly within the time constraints of the exam. This debrief equips you with a structured planning approach and highlights the specific pitfalls to avoid when tackling international investment decisions in AFM.

Duration: 11m