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October 20, 2015 at 1:34 pm
kindly ignore this query here as a comment because i posted it in ask the tutor forum.
October 16, 2015 at 11:54 pm
Do I understand correctly that in questions like in Example 1 we always assume that all the income and expenses are cashflows? My doubt is that in real life for example sales revenue normally never matches to cash receipts from these sales – cash normally recieved on a later date and AR are posted as assets at the moment of sale…
John Moffat says
October 17, 2015 at 9:39 am
Yes – we make that assumption.
(It seems from your questions that you are ‘jumping’ around the lectures – I do suggest that you watch them in order )
October 17, 2015 at 11:27 am
Thank you sir! I will follow your recommendation.
April 9, 2015 at 4:56 am
Please help me understand the treatment of working capital.especially on the part were u said it has to be released
April 11, 2015 at 8:48 am
Working capital is money needed to finance having to accept higher receivables, higher inventories etc..
Therefore it is likely that there will be extra outflows of cash to cover this during the life of the project.
At the end of the project we assume that we no longer need extra receivables etc. and so the money is released – we get back all of the working capital previously invested.
The relevant free lectures for Paper F9 on relevant cash flows for investment appraisal will help you – P4 is exactly the same as F9 in this respect.
April 18, 2015 at 1:45 am
Thank you very much sir
March 7, 2015 at 10:47 am
Sir i dint understand why you ignored the fixed cost and yet the management accountant decided that 20% of $1000 should be absorbed into the new product.
March 7, 2015 at 10:53 am
Absorbing means charging. For profit purposes fixed overheads can be charged to different products any way we want. However for DCF we are only interested in extra cash flows incurred by the company. Simply deciding to split the overheads differently does not mean that the total fixed overheads of the company will change. If the total does not change then there is no additional cash flow.
It may help you to watch the Paper F9 lectures on this.
March 7, 2015 at 10:57 am
Thanks i have understand now that we only concentrate on the extra charge.
February 23, 2015 at 3:14 pm
How can i download the video lecture for P4?
February 23, 2015 at 3:31 pm
Lectures cannot be downloaded – they can only be watched online.
It is the only way that we can keep this website free of charge.
February 10, 2015 at 4:20 pm
Thank You for the lecture
SOUD SAEED says
January 24, 2015 at 4:23 pm
I just got little bit confused regarding two things, please correct me if am wrong
a) In the example 1 above, was it assumed the materials were bought at the end of 1st year, such that they were inflated upto end of 1st year? If this is so how come there were sales at the year one, does this mean all sales occured at the year end?
b) Regarding gearing, can we say that gearing is unsystematic risk, because it is company specific it may vary between different companies and because of this there is no need to include in beta, can we assume it may be eliminated by diversification?
January 24, 2015 at 5:04 pm
In future, I will be grateful if you can ask this sort of question in the Ask the Tutor Forum rather than as a comment on a lecture
In answer to (a):
The production costs are quoted at current prices. The rule is that if costs are quoted at current prices then the cost in 1 years time will be higher because of inflation.
The logic behind this is that if you are thinking of buying this new machine, then you are likely to get quotes regarding the cost of materials etc now (even though you have not yet bought the machine). However, you will not be actually incurring the cost until next year and so by next year the cost quoted (at current prices) will have increased because of inflation.
With regard to the selling price, the question specifically says that they will be sold at $20 per unit in the first year, and so it is only in later years that the cash price will be increased.
In answer to (b):
Gearing is not unsystematic risk. The effect of gearing it to increase the existing risk of the business, whether it be systematic or unsystematic. If the earnings were certain (so no risk) then gearing would have no effect on the risk to shareholders because the dividends would be certain also. Obviously in practice, the earnings are subject to risk (both systematic and unsystematic) and the affect of gearing is to increase the level of risk when it comes to dividends (and therefore for shareholders).
If I am not making this clear, then you will find it helpful to watch the F9 lecture on gearing risk where I go through an example to explain exactly how gearing increases the existing risk in the business.
January 27, 2015 at 11:08 am
I really appreciate for your quick response Mr Moffat, i now got the concept very clearly. I apologize for the mistake regarding posting questions in the comments section rather than posting it in the Ask the Tutor Forum.
Thanks once again.
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