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  2. Dear John,

    Thanks for the lectures, they help greatly. Hope you do not mind that I have a question regarding the inflation of working capital. I struggle to understand why WC is not increased with inflation in the fourth year. Would you be so kind as to clarify please?
    Thank you!

    Krisztina

    • Because the project only lasts 4 years, and therefore no working capital is needed for the 5th year. At the end of the 4th year the working capital is all recovered. My free lectures on relevant cash flows for investment appraisal will help you.

  3. Hello John! Thank you for your lectures, they are of great help!

    I have a question regarding requirement (a) – it says to calculate NPV ‘in nominal terms’ and so I thought we should ignore inflation (and use current selling prices, i.e. 15, 18, …).
    ‘Nominal’ and ‘current’ has always been synonyms to me in this context – as opposite to real prices that take account of inflation. Could you please clarify the meaning of ‘current’ and ‘nominal’ in this requirement?

    • The nominal cash flows are the actual cash flows – so the flows need inflating. We discount the nominal cash flows at the nominal (actual) cost of capital.

      The ‘real’ cash flows are the current price flows ignoring inflation. They are discounted at the real cost of capital (the cost of capital if there was no inflation).

  4. hi john thank you. but i need some clearance especially on the timing of cash flows with respect to tax computation.if tax is claimed on a reducing balance and it is paid at the start of the first year of operation, in which year will it be? please help me clarrify that.

    • I do go through the timing of tax flows in the main lectures – they are a complete free course for Paper F9.

      The start of the first year is time 0. However if a machine is purchased on the first day of the year, then the first tax saving on capital allowances will be at time 2 (if there is a 1 year delay in the payment of tax) or at time 1 if tax is payable immediately.
      (Whether it is reducing balance or straight line tax allowable depreciation (capital allowances) makes no difference whatsoever to the timing of the tax saving.

      I do suggest that you watch my free lectures on this.

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