# Relevant Cash Flows for DCF Inflation (example 4)

1. 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.

• 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.)

• 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!

• 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. 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.

• 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.

• says

Capital allowances use the reducing balance method of depreciation, not the straight line method that you described.

• 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. says

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.

4. says

Brilliant explanation, so easy and straightforward. I wish my classes were the same!!! thank you so much

5. says

oh, what has happened? the lecture was running and suddenly stopped. now all F9 lectures show 0:00 minutes length and do not play =(

6. 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?

7. 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

• says

@annak, acca is tryin to make money out of it, they cant leave that straight forwad i believe!!

• says

@annak, hey annak..where r u frm? u look so smart…which level of prof studies r u in at the moment..

8. says

How do we show the workings on an answer shit. Do we need to show them the way u were doing?

• says

@lloyd, I think you meant sheet? Although the answer sheet can go the way you described if the exam will be really hard one

9. 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!!!

10. says

if all lectures go like this, then, there would be no problems at all.
well organised and easily to understand.

11. says