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    • Profile photo of John Moffat says

      If the are extra (incremental) overheads payable by the company as a result of doing the project, then it is a relevant cash outflow (of the extra amount) when getting the net cash flows each year.

  1. avatar says

    hello,

    Why is the material cost 864 in the first year and not 800? Wouldnt you buy the material on day one so therefore there would be no inflation in a day hence why Im confused why we do not use 800.

    The lecture is saying if we do buy the machine it would be next year that we would buy the material, but if we decide to go ahead with the project and buy the machine tomorrow then wouldnt we then buy the material tomorrow aswell so therefore no inflation?

    • Profile photo of John Moffat says

      We assume that the price increases on the first day of each new year. It may be impractical, but that is the assumption we make.
      Also, the term “current prices” automatically always means in the exam that in one year it will inflate by one year, two years inflation in two years time, etc..

    • Profile photo of John Moffat says

      Have you watched the previous lectures, because I spend time on the timing of the cash flows in them.

      It is not ‘year 0′ it is time 0, which is a point in time. Time 0 is ‘now – the start of the first year. Time 1 is one year from now – the end of the first year / start of the second year, and so on.

      We always assume that operating cash flows occur at the ends of year (unless told differently in the question), so although we will be buying materials throughout the first year, we assume that the cash flow occurs at then end of the first year i.e. at time 1.

      • avatar says

        yes, i have watched the previous lecture. i got your point now, i have figure out the where i have made a mess, the mess was on different between time0 and year o. you made it very clear now. thank you so much for your kind reply. its so nice of u . thumbs up…:)

  2. avatar says

    in the NPV calculation, for discount factor calculation what do we use if we have given only real cost of capital 5.7%

    inflation is 5%

    do we use the formula (1+nominal rate)=(1+real rate)x(1+inflation rate), i used this formula but still does not give a round % to use for discount factor.

    Thank you

  3. Profile photo of Samoar says

    Serious problem:

    I have been trying for 2 days, 5 hours in total, but cannot watch any of the lectures. The rest of the site is doing fine.

    On my Google Chrome browser, I have increased the font size as otherwise I get a headache. Could that be the problem?

    What can I do?

    PLEASE HELP !!

    • Profile photo of John Moffat says

      Well…..there are really two answers to this.

      With regard to a general inflation rate it is impossible to know for certain but countries do make ‘predictions’ and so we would have to use that.

      With regard however to the inflation applicable to specific flows, then it is really down to estimates.

      It is impossible to predict inflation precisely (just as it is impossible to be able to predict cash flows precisely, even without inflation). All decisions have to be based on estimates and therefore it is impossible to make ‘perfect’ decisions.

  4. avatar says

    i apologize for asking this silly question umm for capital allowance why is it not written in year 1 column ? it starts from the first year till it is sold so why it’s not written in year 1-3 ?

    • Profile photo of John Moffat says

      The first capital allowances are indeed calculated at the end of the first year (i.e. time 1).

      However, the second to last line of the question says that the tax is 1 year in arrears.

      As a result, the benefit of the capital allowances will not occur until 1 year later – i.e. time 2.

    • Profile photo of John Moffat says

      We always assume that the business is already making profits from other sources, and is therefore already paying tax.

      As a result, a ‘loss’ in any year from this investment isn’t really a loss, it simply reduces the profits they are already making and therefore saves tax they would otherwise have been paying.

  5. avatar says

    Hey John,
    Here is a confusion with Bpp question for inflation:

    I figured-out everything almost correct somewhere, but the working capital is really disturbing me. I share you portion of the question and also answer for that portion:

    Inc/Dec. in working capitals are as follows:
    Year 0: 20×3= +20000
    Year 1: 20×4= +10000
    Year 2: 20×5= -15000
    Year 3: 20×5= -15000

    The inflation is to be increased by 10%( applied to 20×4 and onwards). The project is 3years.

    What I did:
    20×3 year forward to 20×4= 30000 * 1.10 = 33000 ( this is correct)
    BUT
    20×5 = -15000 * 1.10 = -16500 +33000 = 16500 ( Incorrect )
    same for 20×6

    What Book did:
    20×3 20×4 20×5 20×6
    $ $ $ $
    Investment @20X3 prices 20,000 30,000 15,000 0
    Investment @inflated prices 20,000 33,000 18,150 0
    Year Move @inflated prices (20,000) (13,000) 14,850 18150

    I am curious how 18150 and onward figures arrive :(

    Many Thanks

    • avatar says

      Oops I think this part is confusing to read: WHAT BOOK DID:

      I’m doing it again here for easy reading:

      I’m convinced for till year 20X4, lets start onward periods;
      20X5:
      Investment @20X3 prices: $15000
      Investment @inflated prices: $18150
      Year Move @inflated prices: $14850

      20X6:
      Investment @20X3 prices: $0
      Investment @inflated prices: $0
      Year Move @inflated prices: $18150

    • Profile photo of John Moffat says

      I will answer, but please post questions like this in the Ask the Tutor Forum for Paper F9 – not here, which is for comments on the lecture.

      Without inflation, the requirement at time 2 is 15,000.
      But there will be two years inflation at 10%, so the actual requirement will be 15,000 x 1.1 x 1.1 = 18150.
      (you have only inflated it for one year, but there will be two years inflation)

    • Profile photo of John Moffat says

      Fixed overheads are only relevant if the total changes. Simply absorbing (or charging) the total fixed overheads differently does not mean that the total changes.
      I do stress this in my lecture.

      • avatar says

        So, for yr 1, the adjusted profit is 401 and C.A of 700, hence the tax savings of 75, how about for year 2? Is it a loss or profit?

      • Profile photo of John Moffat says

        Is what a loss or a profit? Why do you care anyway?

        In year 1 there is a cash profit of 401 and so tax payable of 100 at time 2.
        There is tax saving from capital allowances at time 2 of 175.

        In year 2 there is a cash profit of 435 and so the tax on this is 109 payable at time 2.
        There is also a tax saving from capital allowances of 131.

  6. avatar says

    I’m a little bit confused about the material inflation cost. Assuming that material is purchased equally throughout the year, wouldn’t the materials purchased at the beginning of the year be cheaper than those purchased at the end of the year? If that were the case, why wouldn’t we calculate using an average inflation rate (eg. 5% for year one, 15% for year two etc). Sorry if I’m being stupid! Thanks for your help.

    • Profile photo of John Moffat says

      What you are saying is sensible in real life. However for the exam we always assume that the price goes up in ‘yearly jumps’. (It is a point you could make if a written part asked for the limitations of what you have done in the arithmetic.)

      • avatar says

        Thanks for clarifying that for me.

        One more thing. Even for exam purposes, would I presume that material is purchased in advance for the whole year (instead of at the end of each year)? Therefore, do I presume that in year 0, I buy a machine? But then I wait 12 months until the start of year 1, when I buy the material? Or instead should I assume that year 0 is the very start of year 1, and materials are not purchased until the end of the year?

        Sorry if I’m making life difficult, I just can’t get it clear in my head at the moment!

      • Profile photo of John Moffat says

        Time 0 is the start of the first year. Time 1 is the end of the first year / start of the second year. And so on…..
        We always assume that operating flows (e.g. revenue, materials, labour etc.) occur at the ends of years (unless told otherwise).

        So the first years purchases will result in a cash flow at time 1, the second years purchases result in a cash flow at time 2 and so on. :-)

  7. avatar says

    Based on my residual knowledge, I thought when the depreciation rate is 20% it means the asset life is 5years or 25% it means it is 4years. But to my greatest surprise when the depreciation rate was 25% (four years based on default knowledge) and the investment under appraisal has a useful life of 3years, the depreciation working stopped at 3years instead of 4years. Is it that the question is NOT possible to come like that in exam , in other words, just used like that or we are to consider JUST the investment under the appraisal’s useful life of 3years ONLY in this case i.e. the example given and ignore the default rule. Indeed, you are great! Thanks a lot.

    • Profile photo of elsie2009 says

      @rolake You are confusing depreciation with capital allowances. Depreciation is the accounting charge to the profit and loss over the economical useful life of an asset. Capital allowances are a reduction in tax payable on qualifying assets which reduces the amount of corporation tax owing.

      In addition depreciation is a notional accounting cost and not a CASH flow it is therefore not a relevant cost and should be ignored.

      • Profile photo of John Moffat says

        Be careful – although capital allowances are usually reducing balance, there have been some questions where you have been told that they are calculated straight line. (I am only talking about Paper F9 obviously).
        The question will always tell you the capital allowance ‘rules’.

  8. avatar says

    In my BPP book, we have the ‘fisher formula’, (1+i)=(1+r)(1+h),
    why no mention of this in opentuition notes or lectures? Please help….is it the formula that is on page 52 of the notes?

  9. Profile photo of annak says

    Great explanations! I started watching all of lectures and the subject suddenly feels so straightforward. Why books can not be written in that way?! The taxation on investment seems now such a simple little calculation.
    If I pass F9 it will be only thanks to those lectures.
    Hugely appreciated :-)

  10. Profile photo of maggs says

    well explained, keep up the good work, i am ready to attempt questions on this and am pretty sure i will tackle them with no difficulties at all. You are simply the best!!!

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