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  1. 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.

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