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Maria says

Dear John,

Please I require some explanation on cash conversion cycle and the calculation of the ratios. I listened to your F9 lectures but I am still struggling to understand these.

Inventory days = 15

Receivable days =10

Payable days = 14

Cash conversion cycle is 11 days.

This is how I interpret this, in 25 days I get cash, however the first 14 days out of the 25 days I have to pay out cash, so I still need to wait 11 days to get cash back? but I really still need to wait the whole 25 days to get back cash regardless of the fact that the first 14 days I pay out cash. Please help as I am really confused!

Also for the ratios, say receivables days 24,000/50,000 (Receivables/Sales)This just tells me that receivables is 48% of total sales. when I multiply it by 365 days then what does that mean? I don’t see how it means it takes 175.2 days to collect sales. Rather, I interpret this as receivables are outstanding for 175.2 days out of the whole year.

Please help explain from different angles, I’m sure I will get it once you explain vividly to me John M.

Thank you for your assistance.

John Moffat says

In future please post questions either under the relevant lecture, or (if you want me to answer) in the Ask ACCA Tutor forum for F9. This question has nothing to do with relevant cash flows for DCF.

The operating cycle is the time that you are without the cash – i.e. the time between receiving the cash and paying out the cash.

Our bank balance only falls when we pay out to buy the materials, which is in 14 days. The bank balance goes up again when we receive the cash from our customers from selling the goods, which is in 25 days. So we are without the cash for 11 days.

If we have sales of 50,000, the the sales per day are 50,000/365.

If the receivables are 24,000 at the end of the year, then it means we are owed for sales for 24,000 / sales per day. That comes to 175.2 days. So it means that we are allowing customers to take 175.2 days to pay us.

Maria says

Thanks. Well i tried to, but it kept logging me off. And i have to be logged on to post a comment. This was the only page that didn’t log me off.

opentuition_team says

try another browser.. we can’t replicate the problem about getting logged off.. maybe some security settings on your PC do it.. not sure

arad says

When to ignore fixed costs.Thanks your lectures are really helping me.

John Moffat says

Fixed costs are only relevant if the total will change as a result of doing the project.

Just absorbing or charging some of the costs to the new project (for profit purposes) is not relevant because it does not mean that the total is changing – it is just being shared differently.

henna says

brilliant lecture…thanks a lot

sdmaalex says

Thanks alot! I learnt this in class, but I had no idea what it was. Even during the revision, I was just wondering what was going on :/

And, now it’s so clear…. Brilliant lecture!

jewel086 says

Not working on iPad …plz fix it ASAP ….thanks

John Moffat says

Have you looked at the technical support page?

The lecture is working fine and does not need fixing.

massivecodedake says

Hi ?john.I have a question about nominal rate of interest.It seems that the cost of capital given in the NPV question is the nominal rate of interest (is it?),then why the cost of capital given in the question doesn’t increase as the rate of inflation increase every year? THX John.

John Moffat says

But the rate of inflation is not increasing each year – the rate is staying constant

massivecodedake says

Er…Actually I mean we have to multiply contribution by (1+inflation rate) every year.Why doesn’t the cost of capital do so ?

John Moffat says

The cash flow keeps increasing, but the rate of inflation stays the same.

The cost of capital will only change if the general rate of inflation changes. (Look at the Fisher formula – the cost of capital depends on the rate of inflation. If the rate of inflation is constant then the cost of capital is constant)

massivecodedake says

Understood. THX !

saulat says

in investment appraisal , we have to give tax payment on cashflows which are sales less variable cost less fixed cost , my question is , the scrap value should be added in the final year after the tax payment ? scrap value and working capital adjustments should be included after we made the tax payment ? kindly guide me , what would be the EXACT FORMAT of net present value /investment appraisal ?

John Moffat says

The lecture on Relevant cash flows for tax gives the EXACT format.

First we list the operating cash flows (sales less variable costs less incremental (extra) fixed costs)

Then we calculate the tax on the operating flows.

Then we list the capital flows (cost and scrap proceeds)

Then we calculate the tax saving on the capital allowances (or ‘tax allowable depreciation’)

Then we bring in the working capital flows (at the end, because they have no tax effect)

saulat says

Thanks its really helpful , my another question is when calculating ROCE/ARR , we make operating cashflows (sales less variable cost less extra fixed cost) into accounting profit i.e operating cashflows less accumulated depreciation divided by projests life equals to accounting profit , right? my question is that whether to include scrap value in the operating cashflows too ?

John Moffat says

Scap proceeds is not an operating flow, but it is taken into account when calculating the depreciation.

saulat says

the discount rate /cost of capital given in the investment appraisal (in which we discount cashflows for present values) is a Nominal rate (money term) ? what basically it is ? nominal ? and is this a before tax or after tax cost of capital ? n my other question is if we r given general inflation so we have to convert Real into Nominal rate ? kindly make it clear . with exaples , it confuses me so much .

John Moffat says

In F9 we always discount the actual (nominal) cash flows at the actual (nominal) after tax cost of capital.

If the cash flows are given in real (current price) terms the we need to inflate them to get the actual (nominal ) cash flows.

If the cost of capital is given in real terms ( the ‘real’ cost of capital) we need to use the formula (with the inflation rate) to get the actual (nominal) cost of capital.

We always use the after tax cost of capital.

For examples watch the lecture again and see the course notes.

saulat says

if v have to inflate the discount rate (to make in money terms) we will use Fishers formula right ? and we will do this if we have General inflation given in the question and clearly stated right ? and the inflation rates given for other elements like sales 5%, material 2% labour 2.5% are called Spefic inflation rates ?

John Moffat says

Yes – everything you have written is correct

saulat says

Thanx it made me clear .

eadinnu says

Seemingly complex things made ordinary. You are a great teacher. It flows like a beautiful poem!

Thank you ver much OT team.

morren says

Hi John:

Thanks for your lecture with such clarity. As it relates to inflation, June 2012 question # 1, how are the inflated selling and variable costs arrived at from years 2 to 4? we are given selling prices from years 1 to 4 being $25, $24, $23 & $23 with 4% inflation the answers given are $26 (ok), $25.96, $25.87, & $26.91. Variable cost given for years 1 to 4 are $10, $11, $12 & $12.50 at 2.5% inflation. answers given are $10.25 (ok), $11.56, 12.92 & $13.80.

Thank you

John Moffat says

Inflation on selling prices is 4% per year.

So the selling price in year 2 is 24 x 1.04^2 and in year 3 is 23 x 1.04^3 and so on.

morren says

Thank you. I did ” x 1.04″ only and not “1.04^2″ etc. Is there a time when you use only “x 1.04″ for each year?

Greatful for your timely response.

John Moffat says

No – you multiply by 1.04 for each year of inflation.

morren says

Thank you

rolake says

You are wonderful.

laeeq says

Excellent ! Very understandable

sarahso says

Great Lecture!

Saad Bin Aziz says

I agree with what my dear brother says. I am from pakistan and even here the teachers are not very talented if i may compare them with John! thank you John for such wonderful lectures.

barzakh says

@Saad Bin Aziz, actually there ARE pretty good teachers here in karachi

arjunudayp91 says

i study at india where there is a great lack for good teachers and i have just(4days) come to know of your videos and already am gonna complete watching all the sessions-they are so addictive which also means you are still to do a lot of marketing about these lectures but i can tell you they ll be more than just a soaring hit……………………!!!!!!!!!!!

kudos u guys rock…………………

the part when you said about bringing

1.05/1.15 = 1/1.15/1.05 …..it hit the penultimate part of my understanding of the fischer’s formula…………

arjunudayp91 says

i am speechless…