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Simply a good start of NPV revision
may i know the timing we should start to claim capital allowance?
from my understanding, if we incurred capital expenditure in year 0, we should claim capital allowance in year 1 unless the question state otherwise. But, should i apply the same concept if first year allowance is given in the question?
time 0 is not a year – it is a point in time.
If you watch the lecture it makes it clear (and if necessary watch the relevant F9 lectures).
However, in P4 do not worry too much about the timing – it depends on assumptions (as does so much of P4). If you state your assumptions then you will get the marks (provided obviously that they are sensible assumptions )
can we tear out the formula sheet, the present value table and the annuity table during the exam time, so that its earsier for us to see the rate and save up time,no need to flip the question booklet many times.
I suggest you send this question to the ACCA… and please post on opentuition the reply from them thanks!
thank you for this lecture , again very well explained I have one question in relation to NPV. I just looked in my notes from F9, and my lecturer then ask us in calculation of NPV first include capital allowances in calculation of taxable profit than calculate and deduct tax and than add capital allowances back. So the tax effect is at the end the same as in NPV which you presented. I remember that my lecturer justified this approach because taxable profit which include capital allowances was needed in the calculation of something else, and well I don’t remember now where did we use it. Could you please tell me where we we can use such a profit, and if it will be used in the calculation in P4
So will it be wrong to include fixed overhead ????
@springy, see what I have written below in reply to somebody else.
Fixed overheads are only relevant if the total changes as a result of doing the new project.
incemental fixed cost(project related)
step fixed cost
are relent costs….
thanks a good revision of NPV
In the NPV (e.g 1) question we inflated the sales and costs at different inflation rates, which essentially mean that we considered the nominal cash flows. In that case, aren’t we supposed to consider the nominal rate as well which is the real rate inflated at the general inflation?
@Ruzz Su, Yes – certainly.
However, the nominal cost of capital is the actual cost of capital. Since all the question says is that the cost of capital is 10% we must assume that it is the actual (i.e. nominal) cost of capital. We would always assume this unless we were specifically told the ‘real’ cost of capital.
(Additionally, since the question does not give the general rate of inflation, the again we have to assume that the cost of capital given is the actual WACC i.e. the nominal rate.)
Thanks very much for your help.
Fixed overheads are only relevant if the total fixed overheads for the company increase.
If the questions simply says that some of the overheads are allocated to the project, it does not mean that the total expenditure changes.
(The point is that for profit purposes a company change split the overheads between projects any way that they want to, but again, the total cash flow for the company only changes if the total fixed overhead bill changes.)
hi please can you just confirm why we didnt take into account of fixed overhead cost?
@osru, Listen from 13.18 to 13.50
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