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Hi John
5th para 2nd sentence of The question stated that “The working capital will be increased annually at the start of each of Years 2 to 4 by the inflation rate….”
It seems that the requirement is to have inflation calculation start from year 2 onwards?
The answer is otherwise as it starts from year 1. Please advise and thanks for the help.
Also, 5th para last sentece “The marketing expenditure can be assumed to be made at the end of year 1 and be a tax allowable expense”
It mentioned tax allowable expense but how should we reflect this in our NPV calculation? It didn’t appear in the answer sheet…
Thanks John.
First question:
The question says it will be increased annually at the start of each year.
The first year starts at time 0 and finishes at time 1.
The second year starts at time 1 and finishes at time 2, and so on.Therefore the working capital needed at the start of year 2 is needed in 1 years time and is therefore at time 1.
(We are discounting for points in time that are 1 year apart)
Second question:
The marketing expenditure has been treated as we treat all expenses. It as been subtracted in arriving at the taxable profit (because it is tax allowable) and the tax has been calculated on the taxable profit.
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