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Relevant Cash Flows for DCF – Inflation effective rates – ACCA Financial Management (FM)

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  2. Sir I was revising the lecture notes , and in example 6 the notes say to use 10% as the real cost of capital by rounding up the 9.52%. But say we had a value of 9.4% would we round down to 9 % in the exam ?

  3. Sir.. could you please explain how inflations for sales in adjusted in the following situation.

    Annual sales are expected to be 30,000 units in Years 1 and 2 and will then fall by 5,000 units per year in both Years 3 and 4. The selling price in first-year terms is expected to be $4.40 per unit and this is then expected to inflate by 3% per annum.

    Also, could you please briefly explain different terms which examiner may use in exam such as “first-year terms” etc. and there relevant adjustment.

    • You must ask this kind of question in the ask the tutor forum and not as a comment on a lecture.

      Have you watched the earlier lectures on inflation?
      The flow at time 1 is 30,000 x $4.40; at time 2 is 30,000 x 4.4 x 1.03 at time 3 is 25,000 x 4.4 x 1.03^2, and at time 4 is 25,000 x 1.03^3

      ‘First year terms’ is not a phrase normally used in the exam, but explains itself – it is the selling price in the first year.

      I explain the terms in the previous lecture.

  4. hi sir,
    i was going through the technical article after chapter 8 ” advance investment appraisal ”
    i could not understand what they meant by fixed appraisal horizon, can you please help me out with that nd also i am writing my paper in a weeks time on dec 6 any important aspects that i can focus on sir?
    thank you for your notes and your lectures sir i am going through all of it and solving one of my exam kit provided by kaplan publishing will that be enough for the exam sir?
    thank you in advance.

  6. Hi John,

    I’m doing a re-sit this June, and I had a sections C question in my March exam which I’m still confused by – please help!

    In the question is gave me inflation separately, and then a general rate of inflation.

    It then went on to ask for the real NPV and the nominal NPV. It gave me the real COC and the nominal COC.

    Am I right in thinking that for the nominal NPV, I inflate items separately, ignoring the general rate of inflation, and for the real NPV I inflate at the general rate only?

    I’m confused is to whether I inflate at all at the real rate!

    Thank you
    Toni

    • I advise you take a look at the video lectures on Chapter 8 dealing with inflation including effective (or real) rates. The real project NPV is calculated using the effective (or real) rate and the nominal or actual NPV is calculated using the nominal or actual cost of capital. To calculate the real NPV you must first calculate the effective cost of capital using the fisher model.

      Inflating the cash flows will depend on the question as some cash flows are expected to inflate at the same rate.

      I hope this will be of help.

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