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Hi Sir
Can you please help me with below 2 points on Okan sep19 question
1. On calculating the exchange rate between y$ and £ in ppp formula why UK is considered as base.
2. In working capital why diff in 2 years the way its usually done is not taken.
M sure m missing some point here can you please guide
1. Because the Y$ is quoted against 1 Pound.
(It is explained in Chapter 22 of our free lecture notes and the free lectures that go with them.)2. The working capital figures are as per the instructions in the question (which is the most common sort of way in both Paper AFM and in Paper FM). “At the start of every year, Project Alpha will require working capital. In the first year this will be 10% of the estimated year 1 sales revenue. In subsequent years, the project will require an increase or a reduction in working capital of 15% for every $1 increase or decrease in sales revenue respectively. The working capital is expected to be fully released when Project Alpha ceases.”
So at time 0 the working capital is 10% x 17,325 = 1,733.
At time 1 it is 15% x (34,304 – 17,235) = 2,547
and so on 🙂
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