Blipton International(12/08)

I do not have a BPP Kit - I do not work for BPP :-) However, I do have the actual exam question! (i) The cash flows at time 2 are 52 in current prices (i.e. ignoring inflation) and so the actual (nominal) cash flows need to be inflated at 2.5%. Since the flow is at time 2, there will be two years inflation, so the actual cash flow is 52 x (1.025^2) = 54.63 Similarly the cash flow at time 3 needs inflating for 3 years and so on. (ii) the formula for calculating the discount factor is given at the top of the tables. It is 1/(1+r)^n So for 1 year it is 1/1.092 ^1 = 0.916 (However you would not have lost marks if you had simply taken the nearest % (9%) and used the tables. The answer would have been a bit different but would not have lost marks) (iii) The investment phase is the initial investment together with the capital allowance tax savings resulting from the initial investment.