Hi John, I am little bit confused about which year to start applying the inflation rates on the selling price and variable cost.

1st Scenario: The current selling price is $30 per unit and is expected to increase by 5% a year. The suggested answer started applying the inflation in year 2.

2nd Scenario: The selling price of product SEP (in current price terms) will be GH垄20 per unit and inflation is expected to be 4% per year. The suggested answer started applying the inflation in year 1.

Please can someone help me on why the different treatment. Thank you.

It depends on the precise wording in the question. If a flow is given at ‘current prices’ then it automatically inflated in the first year. If, on the other hand, you are told what the initial selling price will be in the first year then it doesn’t inflate until the second year.

Hello Sir, For year 3, I’m having a little confusi9n about the total of 1694. Can you ex0lain me how did we got this number? And why did we add 200 in year 3.

Thank you for the lectures, I enjoy them very much. I have a question regarding the tax allowance in the question. The tax allowance is higher than the actual tax payable, which generates additional cash inflow. Shouldn鈥檛 the maximum tax allowance be the actual tax payable?

No. It is because we always assume that the company is already making profits and is therefore already paying tax. Doing an extra project means they pay more tax because of the extra profits, but save tax on the extra capital allowances.

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JeffOsei says

Hi John, I am little bit confused about which year to start applying the inflation rates on the selling price and variable cost.

1st Scenario: The current selling price is $30 per unit and is expected to increase by 5% a year. The suggested answer started applying the inflation in year 2.

2nd Scenario: The selling price of product SEP (in current price terms) will be GH垄20 per unit and inflation is expected to be 4% per year. The suggested answer started applying the inflation in year 1.

Please can someone help me on why the different treatment.

Thank you.

John Moffat says

I do explain this point in my lectures.

It depends on the precise wording in the question. If a flow is given at ‘current prices’ then it automatically inflated in the first year. If, on the other hand, you are told what the initial selling price will be in the first year then it doesn’t inflate until the second year.

JeffOsei says

Thank you Sir. I get it

John Moffat says

That’s great 馃檪

gree says

Can someone please explain me why cost scrap is considered as 2800 and not 1000?

gree says

Sorry for the question.

I got it

Cost is (2800) and scrap is 1000 in year 0 and year 3 respectively.

John Moffat says

Correct 馃檪

priyankar5 says

Hello Sir,

For year 3, I’m having a little confusi9n about the total of 1694. Can you ex0lain me how did we got this number?

And why did we add 200 in year 3.

Thank you

John Moffat says

1694 is the total of the cash inflows less the cash outflows.

200 is added as the recovery of the working capital as explained in the earlier lecture on working capital.

John Moffat says

Because (as I explain in the lecture) there are no extra fixed overheads to the company – it i s simply a reapportionment of existing fixed overheads.

sheen00 says

Why didnt you minus the fixed overhead and then calculate the tax of 25%??

polyteknica says

Dear sir,

Thank you for the lectures, I enjoy them very much. I have a question regarding the tax allowance in the question. The tax allowance is higher than the actual tax payable, which generates additional cash inflow. Shouldn鈥檛 the maximum tax allowance be the actual tax payable?

Kind regards,

Gabriel

John Moffat says

No. It is because we always assume that the company is already making profits and is therefore already paying tax. Doing an extra project means they pay more tax because of the extra profits, but save tax on the extra capital allowances.

polyteknica says

Thank you for the clarification, my mistake as I didn鈥檛 put the whole picture of the company.