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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › June 2010 Seal Island
Sir,
In the question i mentioned, they have said –
“The core macro economic assumptions are that Roseland GDP will grow at an annual rate of 4% (nominal) and inflation will be maintained at the 2% target set by the Government.”
Now when inflating hte cash flows in future years, they have taken the 4% growth rate and not 2%, why?
It is not mentioned which rate to use in question…
Hope to hear from you soon…
regards
I think I answered you on this one during the chat session. Let me know if not!
Sir, I have the same question…
When we calculate annuity, why we take 4% growth rate but not the 2% growth rate?
Is it because it is stated in the question that “annual operating surplus in CASH TERMS…”?
So cash terms(I assume it is the same as money terms, right?) are changing every year (i.e. increase by 4%) That is why we increase revenue by 4% every year…
It is because it is the generation of electricity and the demand is more likely to be affected by the GDP growth than the inflation target (which is unlikely to be kept to anyway in the long term because of the GDP growth).
Obviously the decommissioning costs have to be at 4% because the question says so.
Thank you!)
You are welcome 🙂
Sir y r we dicounting cfs with MONEY/Nominal coc of 10% ? After applying growth of GDP do they become money cfs?
You discount the nominal (actual) cash flows at the nominal (actual) cost of capital.
However, because it is such a long annuity, it would take ages to apply inflation and deal with each flow individually. That is why the examiner gives a formula to use at the end of the question which deals with inflating at 4% and discount at 10%.
So dats means by incorporating growth in cash surpluses n decomissioning costs they have become nominal cfs …therefore we r discounting them at nominal coc of 10%? Thank u so much
Correct, and you are welcome 🙂