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Laiq Hussain says
July 26, 2016 at 6:43 am
We are purchasing materials at the current price throughout the 1st year and then just paying for it at the end. We know the current price as it is given in the question. Then why inflation applies for time 1 (or 1st year) as we are purchasing the materials at current price in 1st year ?
John Moffat says
July 26, 2016 at 7:07 am
But we have not yet decided whether or not to do the new project. So the first year of the project will be next year. The current price is the price we have been quoted this year.
Always in the exam, if you are given a figure at current prices then the actual cash in the first year will be with 1 years inflation, in the second year will be with 2 years inflation, and so on 🙂
July 27, 2016 at 10:07 am
Thank you very much. It is clear now.
July 27, 2016 at 11:16 am
You are welcome 🙂
May 25, 2016 at 8:14 am
just out of curiosity i wanted to know what happens to the taxable amount in the last year?
Because we just worked out till the balance allowance and 30% of 575 and we got the tax savings.
But what was the actual taxable amount?
PS.Another amazing lecture video John!
Thanks a bunch.
Your explanation makes it very easy to understand the concepts.
May 25, 2016 at 9:45 am
The actual taxable amount is the operating profit less the balance allowance.
Easier in F9 is to calculate the tax on the operating profit and the sax saving on the allowance separately.
(And thank you for the comment 🙂 )
May 25, 2016 at 10:07 am
Thanks John 🙂
My exam is in 2 weeks.
Wish me luck! 😀
And keep up the good work.
May 18, 2016 at 12:00 pm
I may have missed your explanation if this question was asked . We do not inflate year 1 sale price of 20 in your calculation but start inflating from year 2.
All expenses are inflated from year 1.
Bit confusing – even the question says the price of $20 in the first year I still do have this question – why the sale price is not inflated in year 1 ?
May 18, 2016 at 2:33 pm
If the question says that the price will be $20 in the first year, then it will be $20. How can it inflate if we have decided to fix our initial selling price at $20?
With costs on the other hand, it is less likely that we will know what the cost will be in the first year (we haven’t even bought the machine now). What we will know is the current price, but by next year (the first year of the having the machine) then it will have inflated.
May 3, 2016 at 3:16 pm
hi John! you are the best! I love your paste with passion.
however, i’ld like to know when best to include depreciation in cash flow like in this example again ( I mean should it only be when it affects tax?).
in addition, can you give some other examples of items (other than depreciation)that are not relevant cash flow.
thanks a million
May 3, 2016 at 6:03 pm
As far as the exam is concerned, it is only depreciation that you need to worry about 🙂
April 27, 2016 at 9:28 pm
in this example 4 chapter 8 i got a question.
why in the cash flow you did not include the 20% from the overheads?
April 28, 2016 at 9:18 am
I do actually explain in the lecture.
The question says that 20% of overheads are absorbed (charged) to the new project, but this does not mean that the total overheads increase. We are only interested in any extra cash flows as a result of doing the project, so if the total overheads do not change then there is no extra cash flow.
April 18, 2016 at 9:50 pm
I am a little confused that the inflation rate for labour is different than the one for material. Should the rate not be equal for the same period?
April 19, 2016 at 7:36 am
But why? Although there will be a general rate of inflation in a country, that is only an average – not everything will inflate at the same rate. Think about oil prices – sometimes they go up more than other goods – sometimes the go up less than other goods.
November 3, 2015 at 3:25 pm
Great lecture Sir.
My question is if the net operating flow was a loss, i.e. a negative value (401) in the first year how would we deal with the tax on operating flows and in tax savings on capital allowances for the next year?
Thanks in advance.
November 3, 2015 at 3:49 pm
We always assume (in Paper F9) that the company is already making profits from other projects and is therefore already paying tax.
Therefore if the operating flows from this project are negative then it will save tax (because the total profit of the business will be lower).
So we deal with the tax on operating profits in exactly the same way as always – if there is a positive operating flow then there is a tax outflow; if there is a negative operating flow then there is a tax inflow.
Capital allowances are not affected – the tax savings on them will be the same whatever happens.
November 3, 2015 at 8:49 pm
I got it. Thanks Sir.?
November 4, 2015 at 8:15 am
May 9, 2015 at 8:47 pm
sir what do we need to do if we got extra overheads relevant to this project
May 10, 2015 at 8:50 am
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.
April 22, 2015 at 12:01 pm
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?
April 22, 2015 at 12:14 pm
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..
April 21, 2015 at 10:50 pm
what would you do with depreciation if there was no capital allowances?
April 22, 2015 at 8:03 am
You would ignore it because it is not a cash flow.
(Depreciation is always ignored. Capital allowances are only considered because of the affect on the tax.)
April 22, 2015 at 2:05 pm
so say for example the question said depreciation is absorbed into the fixed costs, would you have to take away depreciation from the fixed costs?
April 22, 2015 at 2:13 pm
Yes – you would. We are only concerned with cash flows and depreciation is not a cash flow.
April 21, 2015 at 1:36 pm
one things i am confuse about is , if we dont buy the material now on year 0, then how we gonna produce the product to sale on year 1?
April 21, 2015 at 2:29 pm
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.
April 21, 2015 at 5:03 pm
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…:)
April 4, 2015 at 3:27 pm
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.
April 5, 2015 at 12:29 am
In that case you would discount using the nearest % – the examiner expects you to use tables rather than calculate the discount factors exactly.
However it is very unusual to be asked to use real rates. Usually we inflate the flows and then discount at the actual cost of capital
April 6, 2015 at 6:54 pm
Thank you so much
February 19, 2015 at 6:39 am
Thank you John for this beautiful Lecture.
January 19, 2015 at 4:58 pm
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 !!
January 19, 2015 at 5:26 pm
The lectures are all working fine, so the problem is definitely at your end.
Best is to go to the support page (the link to it is above). If the suggestions there do not sort out the problem then leave another message on that page and admin will try and help you.
January 19, 2015 at 5:55 pm
Rana Mateen says
January 18, 2015 at 3:46 pm
Sir i want to ask from where we can get inflation rate which we can use for our investment appraisals in real practical life?
January 18, 2015 at 6:19 pm
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.
February 19, 2015 at 6:45 am
thanks Sir I got it now.
December 29, 2014 at 11:16 am
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 ?
December 29, 2014 at 12:43 pm
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.
November 7, 2014 at 6:09 pm
why you did not incorporate inflation in year 1 for sales?… its a little bit confusing point for me otherwise great lecture …..
November 7, 2014 at 6:25 pm
sorry i should have read the question carefully it is mentioned in question that the new product will be sold 20p.u in the first year…sorry my mistake…
October 7, 2014 at 8:25 pm
Mr Moffat, I’m confused about tax. Please, could you clarify for me how tax savings can be more than tax paid? What does it mean in real life?
October 8, 2014 at 4:31 am
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.
May 18, 2014 at 2:20 pm
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)
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 🙁
May 18, 2014 at 2:25 pm
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;
Investment @20X3 prices: $15000
Investment @inflated prices: $18150
Year Move @inflated prices: $14850
Investment @20X3 prices: $0
Investment @inflated prices: $0
Year Move @inflated prices: $18150
May 18, 2014 at 2:29 pm
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)
May 18, 2014 at 2:41 pm
ok cool! Thanks 🙂
April 23, 2014 at 6:17 am
I Can’t Understand Why you have not Treated with FIXED OVERHEADS in this Calculation?
April 23, 2014 at 8:34 pm
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.
February 14, 2014 at 4:13 pm
Hi Sir, I got a bit confused and did not understand the last bit of this lecture regarding the loss relief?
February 14, 2014 at 4:43 pm
I was just saying that for F9, loss relief is not relevant.
If they make profits they pay tax, if they make losses they save tax.
February 14, 2014 at 5:53 pm
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?
February 14, 2014 at 10:25 pm
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.
November 23, 2013 at 6:04 pm
Fantastic Lecture! 🙂
M Fauzi says
July 5, 2013 at 5:45 am
Such a clear lecture from a great lecturer!! Many, many thanks.
June 20, 2013 at 11:27 am
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.
June 20, 2013 at 2:27 pm
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.)
June 20, 2013 at 2:47 pm
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!
June 20, 2013 at 2:56 pm
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. 🙂
June 20, 2013 at 3:06 pm
Thanks, I understand now!
April 24, 2013 at 12:14 am
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.
April 25, 2013 at 9:44 pm
@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.
June 20, 2013 at 11:22 am
Capital allowances use the reducing balance method of depreciation, not the straight line method that you described.
June 20, 2013 at 2:25 pm
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’.
April 21, 2013 at 9:23 am
Please opentuition I need an urgent t video lecture on F5 June,2009 Exam Q4 Bit & pieces & Dec 2009 Exam Q5 Stay Clear, Very important.
Thanks for your good jods…!!
April 21, 2013 at 9:29 am
Why is this posted in the F9 forum?
April 21, 2013 at 8:34 am
well delievered lecture. . thanks. .
April 6, 2013 at 7:39 pm
Brilliant explanation, so easy and straightforward. I wish my classes were the same!!! thank you so much
December 1, 2012 at 10:40 am
oh, what has happened? the lecture was running and suddenly stopped. now all F9 lectures show 0:00 minutes length and do not play =(
October 30, 2012 at 12:21 am
This was so simple and easy to understand.Thanks
October 14, 2012 at 3:38 pm
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?
September 8, 2012 at 12:19 pm
Excellent ! ! So simple ! keep it up
April 26, 2012 at 11:06 pm
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 🙂
June 22, 2012 at 1:29 pm
@annak, acca is tryin to make money out of it, they cant leave that straight forwad i believe!!
October 30, 2012 at 8:22 am
@annak, hey annak..where r u frm? u look so smart…which level of prof studies r u in at the moment..
April 13, 2012 at 8:17 pm
How do we show the workings on an answer shit. Do we need to show them the way u were doing?
April 26, 2012 at 11:09 pm
@lloyd, I think you meant sheet? Although the answer sheet can go the way you described if the exam will be really hard one 🙂
April 8, 2012 at 12:02 pm
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!!!
March 3, 2012 at 12:09 pm
Good subject delivery and perfect explaination of subject matter. I like it.
October 14, 2011 at 10:16 am
Really enjoy your lectures and its soo understandable. Thank you so much.
October 2, 2011 at 6:26 am
What the 25% represent?I do not figure out how to calculate the workings of capital flows?Thank you!
July 15, 2011 at 4:38 pm
if all lectures go like this, then, there would be no problems at all.
well organised and easily to understand.
May 24, 2011 at 4:44 pm
You explain more clearer thank you for that
May 12, 2011 at 5:10 pm
Nice Lecture. Very understandable
May 5, 2011 at 12:03 pm
thanks for all your help, your lectures made my home studying more enjoyable because you are very clear in your explanations.
April 13, 2011 at 9:04 pm
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