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Dear Sir
Why are year 1 costs not subject to inflation?
Where do I find the lecture on dealing with the subsidy gain in the NPV?
I thought the 5% loan from the US wit 30% tax worked out cheaper than the Gamal loan with subsidy so I used the US as my cost of capital at 7%….but it was wrong
Dear Sir
It is fine, I worked out the subsidy gain.
Why was the opportunity cost deducted if it was worse option?It was the same product going to the same customer from a different facility…It wasn’t as if the opportunity cost was extra other customers they dropped.
Question still applies about inflation on first year. When do we apply and when not?
The question specifically says that the costs are those for the first year (and therefore they only inflate in later years). It is only when they are quoted at ‘current prices’ that they inflate in the first year.
This is explained in both my AFM and FM lectures.If the go ahead with the new investment, then they will lose the existing contribution. Investment appraisal decisions are always made by considering the extra benefit to the company over and above what they are currently getting.
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