1. avatar says

    @toobaalvi in as close to a lay man explanation as i can, i understand or treat so i understand working capital to mean its like pettycash. ie you already have taxable income from your sales, and you are told you need to have a buffer cash set aside for incidentals and is readily availed towards the project hence you would have already paid the tax for the same money when you received it as revenue etc. or from the source you raised it with.

    The Tutor will answer both of us with a better answer, it just helps me to think of it that way!

    • Avatar of johnmoffat says

      To be honest it does not matter how you think about it provided that you accept that there will be no tax implications, and that (unless you are told otherwise) you will get it all back at the end of the project.

      (Although it is not really petty cash – it is money to finance extra receivables and extra inventory. These would not affect the tax liability, and at the end of the project you no longer need to finance extra receivables etc and so you get the money back :-) )

  2. avatar says

    @Cara you meant for Accounting rate of return, thats when you need taxable profit and all. However the Tutor will correct me if iam wrong, it seems P4 (atleast from what i have covered to date assumes that to be carry forward knowledge hence it does not cover that revision, but that does not mean its irrelevant to do it .

    2. I also wanted to make an observation on the 20% Fixed Overheads, that statement can be confusing in the exam, i know by now we understand irrelevant vis a vis relevant costs in decision making, and that it then means whether this project is embarked on or not the company will still pay the $1000,000. But once the question says ‘should be absorbed ‘ it tends to imply they arise because of the project and could have been avoided etc. (thats the confusion to watch out for)

    The other one is for tax (Payed immediately or one year later ! the later one implies we add for the above example another year 6! as for the (Current prices of inflation! this information are a must to watch out for in the exam!) especially during the reading hours highlight them and scribble what effect they should have e.g whether you start the inflation in year 1 or after year 1.

    Otherwise it would indeed be a welcome gift to get such a straight forward question in an exam setting!

  3. avatar says

    @Cara i remember thats what my lecture also said for F9 i think then we used to get instances where we had to do an accounting rate of return or something, The syllabus i have covered for P4 i havent seen it touched as a method to use in evaluating investments, In any case when explained we have been mostly made aware of its shortcomings as a basis for appraisal method for a projects. as compared to NPV and IRR.

    Admin, I missed the part on why we are not using the 20% Fixed Overheads, i do remember from my previous study though that certain costs are irrelevant in decision making because whether you take on the project or not you still incur them. So is the same logic applied here?!

    2. I will practice more examples i have noticed if ever we get an easy question like this one we would be lucky in the exam as the examiner seems to enjoy confusing us by throwing in all concepts in one question esp the compulsory section. Sometimes i really feel, what is important is really not the numbers but understanding the concept enough to apply it in real life situations. As this type of questions can just take too much of the exam time! in future the answer sheets should have the templates in advance! Whew.

  4. avatar says

    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?

    • Avatar of johnmoffat says

      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 :-) )

  5. avatar says

    helo sir,

    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.


  6. avatar says

    Hello Sir,

    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

    • Avatar of johnmoffat says

      For F9 it does not matter which way you deal with the capital allowances. The answer will be the same whichever way.
      For P4, the same usually applies. The only thing at P4 is that in one question it was the case that if there was a taxable loss, then it was made clear that you could not offset it against other profits (and therefore not simply get a tax saving) but that the losses were carried forward.
      However, to be honest it is best you leave worries about that until P4 – for F9 it does not matter which way you do it. Whichever way you find the easiest to remember :-)

  7. avatar says

    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?

    • Avatar of johnmoffat says

      @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.)

  8. Avatar of johnmoffat says

    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.)

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