Hello I have a doubt sir
For the sales figure inflation..
This is what I did
389.1 *1.074
366.3*1.074 raised to 2
344.7 * 1.074 raised to 3
In the solution given they have done like this
389.1 *1.074 =417
417.8*1.074=449.7
449.7*1.074 = 483
Ok now.. usually we take quantity and multiply by selling price multiplied by inflation rate raised to power of the year ..
And..if different selling rate is given each year we do it in a different way..
But for the above the inflation rate is constant every year.. then why have they not done it like my solution..alsoy second doubt is.. why have they not considered the net interest charges ..
Thankyou
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Mlima
This is for the question mlima.. and my secodn doubt was why they did not deduct net interest charges from operating profit..
When quantity and sales price is not given.. but sales value is given with a constant inflation rate every year.. then are we supposed to do it that way like the examiners solution ?
6y ago#3I don't know which answer you are looking at, but the future growth rate in the examiners own answer is 7.5% (not 7.4%).
In 2013, the revenue was 389.1 and this will grow at 7.5%. The only relevance of the previous 2 years revenue was so as to be able to calculate the average growth rate.
If the revenue is 389.1 growing at 7.5%, then the following year will be 389.1 x 1.075 = 418.3.
At time 2, the revenue will be 389.1 x 1.075^2 = 449.7.
and so on.
It might help you to watch the free Paper FM (was F9) lectures on investment appraisal with inflation.
6y ago#4We never ever subtract interest when arriving at the cash flows!!
Discounting at the WACC is taking account of the interest - it is part of the WACC calculation.
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