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Hi. I am trying to solve a question on my Kaplan exam kit but I don’t know how to consider CAPEX. The problem says the following:
Year 1 Year 2 Year 3
PBIT $ M 3.0 2.7 2.4
Asset base $ m 24 25 26I have to calculate ROI, taking into consideration the following project and numbers:
Capital expenditure in years 1 and 2 and operating cash flow in year 3.
Year 1 Year 2 Year 3 NPV
$ m -0.5 -0.5 2 0.634My understanding is that I add the cash flow to PBIT in year 3 and I add the expenses for the first two years to Asset base. But the solution to the question says that Asset base for Year 1 remains 24 m $, for Year 2 is 25.5 $ m and for Year 3 is 27 $m. I don’t understand quite well why is that.
Can you help me, please, with an answer?Thank you,
Camelia
I don’t have the Kaplan exam kit.
However the asset base is the assets at the start of each year.
So year 1 stays at 24, Year 2 increases by 0.5 due to the investment in year 1. Year 3 increases by 1 because of the investments in years 1 and 2.
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