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- This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.

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- March 6, 2022 at 5:34 am #649950
Question- Hebac co

Question is asking to calculate the nominal NPV but if the requirement ask to calculate Real NPV then what happen to working capital bcoz the Question given the working capital inflation .So How to do that if REAL NPV IS ASKED ?

Usually we take the CF and deflated at general rate of inflation then include the tax and tax benifit then discounted at real discount rate bit confusing what to do with the WC if Real NPV is asked

Thanks in advance

March 6, 2022 at 7:53 am #649955We would discount the real cash flows at the real cost of capital.

To get the real cash flows (i.e. the flows without inflation) you would deflate all of the nominal cash flows (including the working capital) at the general rate of inflation.

To get the real cost of capital (if not given in the question) you use the Fisher formula as explained in my free lectures.March 6, 2022 at 10:07 am #649965So tax will applying to the amount of the defalted CF right ?

March 6, 2022 at 6:25 pm #649994It is arguable (because it is a very silly thing for the examiner to ask), but the safest in the exam is to deflate the net cash flows (after tax). You would be given full marks if you do that.

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