[mmensah]

no worries. I have solved the issue. 25/125= 20% on selling price. Mark up

[mmensah]

why must the annuity factor be (800,000+53,397)/281,000
which is the (initial investment +NPV)/net cash flows. Is that a formula I should remember?

I did the above (800,000+53,397)/281,000= 3.037. I went to the annuity table and looked for a what rate of interest gives a 4 year factor equal to the above… and I get 12%. but the answer is 15%

have I done anything wrong?

[mmensah]

ok got it.

So I needed to have used this formula

(1+m%)= (1+r%)*(1+I%)

Where M= 10% and I = 4%
therefore r= 5.76%

Therefore when using the real rate we get 20,000* 1/r …. 20,000 divided by 1/5.76%
= 347,222

ok got you. thanks sir. so trying to review where I went wrong here.. effectively since there is inflation you discount at the real rate and not the money rate. If there was no inflation it would be fine to use the 10%.

[mmensah]

I have watched this lecture and tried to follow the steps.

https://opentuition.com/acca/f9/discounted-cash-flow-annuities-and-perpetuities/

First thing I did was..

inflate the year 1 cash flow by 4%= 20800
then calculated the perpetuity

= 20,800 divided by1/r where r= 10%
=200,800

since the payment starts in one year time and the perpetuity if from 1 to infinity no need to remove previous years.

I then discounted 200,800 with 0.909 (10% D.F)=189,072

Which is wrong. Can you explain where I have gone wrong.

thanks

[mmensah]

Thanks..

I have seen a similar question and the confusion still appears.

R LTD had profit of $115m for the current year after charging lease charges of $6 million and advertising costs of $4 million for a new product. The new product was launched at the end of the current year and is expected to be on the market for five years. The cost of capital is 8% per annum. Non-current assets have a historical cost of $160m and a replacement cost of $200m. They have been depreciated at 10% per annum. The company has working capital of $22m.

Ignoring taxation, what is the Economic Value Added® of R Ltd in $ million, to 2 decimal places?

The question is very similar to the question above, instead of development costs we have advertising and lease charges.

NOPAT

Profit= 115m
less tax = o
Add back advertising costs= 4m*4/5th= 3.2
add back leases =6m
add historic deprecation= (16)
less economic depreciation= (20)
total =120.2

my advertising costs figure is wrong- but I thought as you said before.. that all 4m of the advertising costs has been deducted from profit. so similar to above 4/5th of that has to be added back to that one year of ammortisation is charged? Advertising and development costs can be ammortised right?

[mmensah]

Hi Cath.

Thanks.. Still a little confused by the point-

1. “It does not include non-capitalized goodwill, which may be an important value driver”

So are we saying that irrespective of whether goodwill is capitalized or not it should be added back to EVA because EVA wants to reflect the TRUE value of goodwill?

How about point 3:

3. EVA encourages managers to focus on projects with large initial expenditure.

Has this got something to do with R&D and the fact that these costs can be amortized/ capitalized and sent to the Balance sheet and not expensed in the early years of the project?

Thank you again Cath.

From Abi.

[mmensah]

ahh I am with you!

thanks

[mmensah]

hhm not sure I follow. But I will have a look at the solution again with fresh eyes in the morning. Thanks anyway. Since it is unlikely we will get such a question.. I will leave it to the bottom of my list when revising..

[mmensah]

ok- I understand.. Mass production implys high automation. Automation is not good for learning.

Got you!

thanks

[mmensah]

ahhh ok! silly mistake. thank you

[mmensah]

ok will do 😉

[mmensah]

ok. got ya! thanks

[mmensah]

I will too watch John Moffats F2/F3 lectures. But Mike.. why must you discount to present value? Goods were sold in 2014… and the question wants figures for 2014.. so why must we bring the figure to its present value? the figures 10 mill is relation to the period 2014?

[mmensah]

normally I post under F7.. since more students visit that page and can help me if there is a delay in a tutors response. essentially they are the same topics F7 and cima F2. I prefer to post under ACCA.. but will sometimes post here

[mmensah]

thanks yes that helps. I am studying cima.. but post questions under acca also. I post here from now on

[mmensah]

yes perfect thanks. I will stick to using the acca f7 section..

[mmensah]

hhm..- i see your point about why the tax authority would allow you more tax allowance just because you revalue your asset. ok it makes sense. thanks

the only point that has confused me is-” Further more, in your example, if the asset increases to 150, the carrying value is 150 and not 140 as you have suggested” please could you explain the point again in layman’s terms. so lets say the asset is 100. Depreciation is 10… cv will be 90. then the asset increases in value to 150… and there is more depreciation of 10.. why would the carrying value not be 140?

[mmensah]

thank you Mike

[mmensah]

haha! thanks. I am no good at remembering these IAS numbers!!! ahh ok.

Yes I follow. I guess like you mentioned when the good are delivered the customer has the opportunity to inspect the goods.. like you said.

[mmensah]

thank you!. keep forgetting that redeemable pref shares are treated as debt and not equity.

[mmensah]

yes it is hard copy!

[mmensah]

fab. thanks for your help.

[mmensah]

ahhh ok. Yes… goes back to the fundamental definition of the preference shares. Ok that is clear. thanks
so if it was a normal ordinary share.. then dividend will go to the SOCIE. ok Clear.

thanks a bunch

[mmensah]

IAS 39*

[mmensah]

IAS 39*

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