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FM doubt

Forums › ACCA Forums › ACCA FM Financial Management Forums › FM doubt

  • This topic has 0 replies, 1 voice, and was last updated 1 year ago by abeera97777.
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  • Author
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  • May 10, 2021 at 6:09 pm #620242
    abeera97777
    Member
    • Topics: 2
    • Replies: 1
    • ☆

    Bell Co has decentralised and divisional managers are allowed to make their own
    investment decisions subject to confirmation by the main company board. Because each of
    the three divisions (Ding, Dong and Merrily) are subject to different levels of risk, it has
    been thought appropriate to use different discount rates in each division.
    Ding has been told that its real discount rate is 5%. The general rate of inflation, based on
    an index that uses a very wide range of prices, is 2%. In the industry in which Ding
    operates, a number of prices are seen to be inflating at 3%.
    Dong is assessing a project in which the first of four annual lease payments has been agreed
    at $120,000. This is payable in one year’s time and subsequent payments will rise by
    4% per annum. Ding’s proper money cost of capital is 8%.
    Merrily is considering investing $1,000,000 in a project, which will produce the following
    annual outflows and inflows.
    Year 1 2 3
    Outflows ($000) 1,800 2,500 1,500
    Inflows ($000) 2,000 3,000 2,000
    The cash flows, which arise at the end of each year, are stated in current year terms. It is
    expected that outflows will rise by 3% per annum and inflows by 2% per annum. The
    money cost of capital of the Merrily Division is 9%

    ANSWER:

    Time 0 1 2 3
    $000 $000 $000 $000
    Inflow (in money terms) – 2,040 3,121 2,122
    Outflow (in money terms) (1,000) (1,854) (2,652) (1,639)
    Net cash flow (1,000) 186 469 483
    Present value at 9% (1,000) 171 395 373
    NPV = $(61,000)

    How did they get the inflows and outflows from time 2. When i am inflating it i am getting a different answer. Am i missing something?

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