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July 3, 2020 at 11:06 pm
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¢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
July 4, 2020 at 10:27 am
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.
July 12, 2020 at 1:53 am
Thank you Sir. I get it
July 12, 2020 at 8:06 am
That’s great 🙂
January 9, 2020 at 2:15 am
Can someone please explain me why cost scrap is considered as 2800 and not 1000?
January 9, 2020 at 2:20 am
Sorry for the question. I got it Cost is (2800) and scrap is 1000 in year 0 and year 3 respectively.
January 9, 2020 at 7:31 am
May 13, 2019 at 6:32 pm
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.
May 14, 2019 at 8:05 am
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.
February 23, 2019 at 11:24 am
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.
February 22, 2019 at 6:08 pm
Why didnt you minus the fixed overhead and then calculate the tax of 25%??
December 30, 2018 at 8:41 am
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’t the maximum tax allowance be the actual tax payable?
Kind regards, Gabriel
December 30, 2018 at 10:05 am
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.
December 30, 2018 at 12:46 pm
Thank you for the clarification, my mistake as I didn’t put the whole picture of the company.
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