Fernhurst sep/Dec 2016 q2 part b

This topic has 4 replies, 4 voices, and was last updated 8 years ago by John Moffat.

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June 6, 2017 at 7:25 pm #391051
shamzz
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Hello,
I do not at all understand the logic behind the answer of question 2 part b. Please help.
June 6, 2017 at 7:35 pm #391055
trietpham
Member
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Hi Shamzz,
I have the same as you. Btw, do u know why the working capital is calculated in year 1 like this?
Thanks,
Triet
June 7, 2017 at 2:58 am #391116
raahulshah
Member
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We are investing 1025 now (T0) . Working capital has to be increased by inflation rate. Year 1(T1) the inflation rate is 4% . So 1025*1.04=1066 . So the increase in Working capital for T1 is 1066-1025=41 .
John will explain it to you better than me . Wait for his reply
June 7, 2017 at 7:15 am #391181
John Moffat
Keymaster
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shamzz: The question is asking for the sensitivity of the revenue.
For the NPV to fall to zero, it needs to fall by 7801. The only flows that will change are the revenue flows (after tax), which have a PV of 43,441.
Therefore the % fall needed in the revenue is 7801/43441
My Paper F9 lectures on this will help you (because this is revision from F9).
June 7, 2017 at 7:16 am #391182
John Moffat
Keymaster
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Trietpham: What raahulshah has written is correct, and I can’t explain it better 🙂
The working capital each year is increased by the inflation rate, so each year you need to calculate the extra needed to make the total increase by the inflation rate.
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