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Hi , (question from bpp kit mock 2 question 4) darn co has following forecast sales revenue year 1 $ 1250 year 2 $2570 ….. and sales units/year year 1 500 year 2 1000 , the forecast cashflows are before taking account of general inflation of 4.7 % ,
what i did was inflate the sales revenue by multiplying it with 1.047 , no problem with this part , but in solution first the sales revenue figure is being deducted with the units figures 500 for each year i.e for year 1 1250-500=750 then being inflated and these units/year are labelled as costs in answer !! this has to be a mistake by bpp ? or am i missing something ?
There is no mistake by BPP – you are not reading the answer carefully.
The sales revenue is calculated as you write in your first paragraph.
The figures you refer to in your second paragraph are in workings 3 of the BPP answer, and are headed up ‘working capital’!! Each year more working capital is needed in order to maintain it at 10% of sales, and more working capital is an outflow.
(The free lectures on investment appraisal will help you.)
can you also look at working 1 inflated net cash inflows , sales revenue is being deducted by costs , how are these costs same as the sales per year figure and i also read the question again there is no mention of such costs apart from the sunk cost and initial investment and also tax ? and many thanks 🙂
You are quite correct – it is a dreadful error by BPP.
It would seem that where it says “Sales (units/year)” in the question, it should actually say “variable costs”.
You should complain!
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