1. 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. :-)

  2. 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’.

  3. 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?

  4. 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 :-)

  5. 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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