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Sir in part c (ii) of this question when we are calculating the sensitivity of the selling price why do we discount the tax liability by one year when it is from time 2-6? Also is the sensitivity of the sales volume and sales price the same?
Tax is payable 1 year in arrears, and therefore the tax flows are at time 2 to 6.
The annuity factor is for flows starting from time 1, and so to get a factor for 2 to 6 we take the 5 year annuity factor (because there are 5 years of flows) and the multiply by the normal PV factor for 1 year because the annuity starts 1 year late (time 2 instead of time 1).
I do explain all this in my Paper MA lectures on discounting.
Greetings,
I have A question Regarding Part A of this question.
In part (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable.
In NPV Calculation, at the Year (0) They are Deducting 90M because it was needed and stated in question as (Additional investment in working capital of $90,000 will be required at the
start of the first year of operation.)But at the 5th year they are adding this 90M amount back in, Why is that so?
Working capital is the cash needed to finance the extra inventory, receivables needed. It is needed throughout the project but when the project finishes it is no longer needed.
We always assume (unless told otherwise) that at the end of the project the working capital is recovered.
Do watch my free lectures on investment appraisal where this is all explained. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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