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Hi Dear tutor, I have a question part c 2
In calculating,investment of any fixed asset to a change in selling price, why we deduct tax from sales revenue?
If for example, the question said investment of any fixed asset to a change in contribution, why we deduct tax from contrubution?I really confused,in which case I should deduct tax in sensitivity analysis?
Need explanation and thanks in advance
If sales revenue increases by $1 then the profit will increase by $1, and therefore if there is tax as (say) 30%, the tax payable will increase by 30% x $1 = $0.30.
Therefore the cash inflow will increase by $1 – $0.30 = $0.70 (or 70% a the change in the sale revenue).
Similarly if the volume increases, the contribution increases. Therefore the profit increase by the same amount and the tax payable increases by 30% x the change in the contribution. So the net affect on the cash flows is an increase of 70% x the change in the contribution.
My Dear tutor thank you very much.
1)I also have some other questions relating to DCF but not relating to calculation.
Sometimes question does not say recover WC and it is recovered and sometimes it says no need to recover WC, which is understandable.If the question does not mention recovery of WC why we recover it?usually WC is given based on inflation to initial working capital investment or wc percentage rate based on inflated sales revenue figure.I can solve it in both method and it is not hard for me but my question why the question specifically does not mention to recover it as i mentioned above.2)My another question, sometimes bond issued and its only par value of 100$ is given not MV and the examiner takes par value as MV for example june 2011 question number 2.
I usually take par value as MV but need explanation.1. As I explain in my lectures, we always assume that the working capital is recovered, because it is no longer needed when the project is finished (unless the question says that the machine is being replaced in which case it is still needed).
2. When new bonds are issued then their market value at the date of issue is the price they are issued at. Since these bonds are issued at par of $100, then the market value is $100 at that date.
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