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Dec 2008 no i (i)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Dec 2008 no i (i)

  • This topic has 1 reply, 2 voices, and was last updated 14 years ago by John Moffat.
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  • December 8, 2010 at 12:09 pm #46770
    ashvin15
    Member
    • Topics: 2
    • Replies: 1
    • ☆

    Please help me to solve dec 2008 q 1. how to get the terminal value of property after year 6 and how to get the nominal cash flow

    December 10, 2010 at 9:55 am #73708
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The way it is calculated is as follows:

    Property prices are rising at 8% pa in real terms. There is general inflation of 2.5% p.a. and so the actual price increase will be (1.08 x 1.025) – 1 = 10.7%

    There is 5 years inflation, and so the value of the property will be:
    6.2M x (1.107)^5 = 10306941

    There is to be a charge for repairs and renewals of 1.2M at current prices.
    So this will inflate at the general rate of inflation of 2.5%, and because it is at current prices there will be 6 years inflation.

    This gives an actual cash flow of 1.2M x (1.025)^6 = 1391632

    So….the net actual (nominal) cash flow is 10306941 – 1391632 = 8915309.

    Hope that helps! (It was bad of the examiner not to show the workings. BPP’s answer is different for just that bit, but there’s is wrong!)

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