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Hello everyone ,
just want to confirm several things :
1. with NPV calculation sometimes in the questions the examiner has put :
a) fixed costs either to be inflated or not
or
b) incremental fixed costs
Please confirm that I should not take into account the constant fixed costs which are not be inflated as they are not relevant , i.e. not cash flow, incremental and future ? Inflated and incremental fixed costs need to be included into operating cash flow. Also there was R&D costs incurred which should be ingnored in my view .
c) working capital
I looked to the examiner answer of one exam question related to working capital. Mashine is not to be replaced after the end of project (4 yrs) . The examiner answer is really complicated . Can I just put let say (1,000) as working capital in yr 1 , then put 1,000 in yr 4 to get zero as the masine is not replacable and do not bother with the cumulative claculations for year 2, 3 ?2. with the sensativity margin calculation
a) if we need to find out the sensativity margin related to sales why we should take into account after tax figure of sale ? Let’s say NPV is 100, PV of sales before tax 1,000 and after tax 700 (1,000-300 tax) should we claculate sensativity margin as 100/700= or 100/1,000 ?
b) if the examiner asks to calculate the sensativity margin related to variable costs should be also make after tax ?
As usual thanks in advance to everyone for your input.
We are interested in any extra fixed costs to the business that result from taking on the new project. If total fixed costs increase as a result of the project then the extra cost is relevant.
I cannot comment on the R&D because you do not say which question you are referring to. Whether or not it is relevant depends on the wording of the question.
For the same reason, I cannot answer your question on working capital – it depends on the wording of the question.
With regard to sensitivity you need the total affect of changes to the relevant figure, and so it is the after-tax PV because a change in the sale will result in a change in the tax (and similarly for a change in costs).
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