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March 5, 2016 at 6:09 pm #303662kelkar
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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
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.March 6, 2016 at 8:27 am #303740John MoffatKeymaster
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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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