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The fixed cost provided by the question was $1700 at current price. Inflation was 2.5 %. The answer in BPP revision kit did not use the increase of the fixed cost but the 1700(pound) in the NPV answer. What I am not clear is from open tution lecture, the increase in fixed cost which is future flows that is required for the NPV BUT Bpp did not apply this rationale. Kindly advice.
Secondly the rate of exchange to convert pounds to dollars. The inverse the spot rate to start with.
Given in question current dollar/ pound is $1.4925/pound. All info in question was present in pounds and the answer require a dollar npv.
With regard to the fixed cost. In general we only include any increase in fixed costs as a result of doing the project – thats what I say in my lecture.
In this example, we only incur the fixed costs if we build the hotel – so the whole of the 1.7M is an extra cost.
With regard to the exchange rate, 1.4925 $’s = 1 £
So to convert £’s to $’s you need to multiply by the exchange rate.
(I don’t know why BPP have bothered dividing by the inverse of the exchange rate – it gives exactly the same answer!)
Obviously when calculating the future exchange rates using the parity formula, Hc and Hb are the other way round.I need help on how the Terminal Value was computed in this question ( ACCA _AFM_dec_2008 question one amounted to 8,915,309
The construction cost was 6.2M. Property prices are inflating by 8% in real terms and so since general inflation is 2.5% it means that the actual inflation in money terms is (1.08 x 1.025) – 1 = 0.107 (or 10.7%).
So the value after 5 years will be 6.2M x (1.107^5) = 10,306,941The charge for repairs and renewals is 1.2M at current prices. There is general inflation at 2.5%, and so the actual money cost is 1.2M x (1.025^6) = 1,391,632
So the net cash inflow is 10,306,941 – 1,391,632 = 8,915,309
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