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April 28, 2018 at 1:57 pm
I do have a stupid question if you let me (sorry): for the Material and labor why do we assume that we will not going to produce anything in the current year if we are going to buy the machine in year 0 ( which means now) ?? they are expecting to produce 100000 units p.a so if we are going to buy the machine now and start producing at once do we still have to apply the inflation rate for the first year ? I mean they are going to incur some material and labor cost before the end of this year.
John Moffat says
April 28, 2018 at 3:28 pm
There is no such thing as ‘year 0’.
Time 0 is ‘now’ – a point in time. Time 1 is 1 year from now, and so on.
Time 0 is the start of the first year, time 1 is the end of the first year and start of the second year, time 2 is the end of the second year and start of the third year, and so on.
The initial investment is ‘now, so time 0.
With regard to operating flows – revenue and expenses – we always assume (unless the question says different). So the flows in the first year occur at the end of the first year, which is time 1 (and need 1 year discounting).
If you are still unsure then I do suggest that you watch the free F9 lectures on investment appraisal, because this is very much revision of F9.
December 5, 2017 at 11:05 pm
Hi in your discounted cashflows lecture you don’t go through intercompany transactions or tax rate diffferences. Is this not likely to be examinable? Thanks
December 6, 2017 at 8:11 am
They are both often examinable – you will find plenty of examples in your Revision Kit. However they are not specific P4 techniques, they are a combination of reading the instructions in the question, using common-sense, and knowledge from previous exams. I do work through examples of both in my lectures linked from’Revision Kit Live’.
September 12, 2017 at 12:35 pm
Sir, in example 1, the working capital is assumed to be recovered back at the end of the project. Looking at this question, it mentions that the machinery would be sold at the end of the year and is not giving any indication of the project ending in the 5th year.
So can we use an assumption that since the project deadline isn’t given, the working capital would be considered invested even after the 5th year and not include 200 inflow in the final year?
September 12, 2017 at 1:04 pm
You could, but in P4 the examiner always recovers the working capital (unless he has specifically said differently in the question).
However, P4 investment appraisal questions always ask for you to state your assumptions, so as long as you do state the assumption then there is no problem 🙂
September 12, 2017 at 1:10 pm
Thanks a lot, sir! 🙂
September 12, 2017 at 1:18 pm
You are welcome 🙂
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