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Hello Sir,
I hope you’re doing good.I have three questions regarding investment appraisal workings in spreadsheet.
1) For incorporating inflation, is it necessary to work separately or we can directly work it in the formula?
For e.g. If selling price of $10 is inflating at 4% pa, then can i simply put
(units*10*1.04^n) in the formula (for each year)?
Or do i have to do separate working for current selling price, inflated selling price for each year and value of sales for each year.2) In NPV calculation, separate working for tax saving from tax-allowable depreciation is necessary or can i use the method where capital allowance is first deducted, then tax calculated and then capital allowances added back.
3) If the question hasn’t mentioned anything about whether or not working capital will be reversed in final year of operation, can i still assume that it will be reversed?
Thanks in advance.
1. Yes – do it by formula as you have written (and as I do in my free lectures)
(Just, obviously, be careful if the selling price inflates and the sales units also change).2. There is no need to show separate workings, by all means subtract the capital allowances, then calculate the tax, and then add back the capital allowances. However it doesn’t really save any time because the time is spent calculating the capital allowances (whichever way you do it) and you must show the workings for the allowances themselves.
3. Always assume that all the working capital is recovered at the end of the project unless (a) the question specifies differently, or (b) the question makes it clear that production will continue (so they will have to buy a new machine) and therefore the working capital will still be needed.
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