- November 14, 2015 at 6:22 am #282249
December 2008 question 3 part b and December 2010 question 1 part a
I am confused with the way the examiner has calculated the working capital. Can you please explain me this…November 14, 2015 at 7:57 am #282270
In December 2010 the initial working capital is 250 and there is therefore an outflow of 250 at time 0.
The question says that it will increase in line with general inflation (which is 4.5%). So the working capital needed at time 1 will be 250 x 1.045 = 261.
However they already have 250, and so the extra outflow at time 1 is 261 – 250 = 11.
(or, of course, an extra 4.5% x 250 = 11)
At time 2 it will need to increase again to 261 x 1.045 = 273.
However they already have 261 and so the extra outflow at time 2 is 273 – 261 = 12
(or an extra 4.5% x 261 = 12)
and so on….
Usually we assume that at the end of the project, all of the working capital is recovered and there is therefore a cash inflow.
However (unusually for the exam) this question specifically says to ignore working capital recovery.November 14, 2015 at 1:16 pm #282314
Thank you sir…
But in 2008 December how did he get 270 in year 5?November 14, 2015 at 2:21 pm #282328
As I wrote before, we always assume that at the end of the project all of the working capital is recovered (unless the question says differently).
The total outflow of working capital over the project is 250 + 7.2 + 7.4 + 7.6 + 7.9. This is all recovered at the end of the project (and is 270.1, not 270).
Have you watched the free lectures on investment appraisal with working capital?November 14, 2015 at 2:23 pm #282330
Yes sir I did watch them but I had a lil confusion. It’s cleared now.
Thank you so much. Very clear explanation.November 14, 2015 at 2:36 pm #282337
You are welcome 🙂November 14, 2015 at 4:41 pm #282362
Sir in June 2008 question 4
Why did the examiner take capital allowances of 250000.Shouldn’t it be 250000*30%? If I take 250000*30% my answer does not match with the examiners answer.November 14, 2015 at 6:03 pm #282381
When you are asking about something else then you must start a new thread!!
We cannot and do not offer personal tuition and June 2008 Q4 has nothing to do with your earlier questions about the working capital.
Also, in future please give the name of the question if you are asking about old questions that are not on the ACCA website – otherwise it takes a long time for me to find them.
The examiner subtracts the capital allowances from the operating cash flow to calculate the tax, and then adds back the capital allowances because they are not a cash flow.
Alternatively you can calculate the tax on the operating cash flow, and then separately calculate the tax saving on the capital allowances.
Both ways give exactly the same answer and both ways get full marks.November 15, 2015 at 1:53 am #282436
Sorry sir, I wasn’t aware of the rules.
I have calculated separately but I get a difference of 194.November 15, 2015 at 9:11 am #282481
You must have made an arithmetic mistake but I obviously do not know where.
For year 1, if you to it the other way, then:
Operating cash flow: 287,000
Tax on operating flow: 30% x 287,000 = (86,100)
Tax saving on CA’s: 30% x 250,000 = 75,000
Working capital: (29,287)
Net cash flow = 287,000 – 86,100 + 75,000 – 29.287 = 246,613 which is exactly the same as in the examiners answer.November 16, 2015 at 6:38 am #282735
Got it. Thank you Sir.November 16, 2015 at 7:31 am #282747
You are welcome 🙂
- You must be logged in to reply to this topic.