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Sir could u pls explain me why inflation of 5% is not included for building and machinery for year 1,for appraisal of Swiss investment we r only taking figure 6200 and 6400 without inflation of 5%.Thanks
They are not stated as being at current prices and therefore it is assumed that the estimates already take into account any inflation applicable.
Thank you sir.One more question why dont we include interest in free cash flow i mean for calculating npv.In question Integrand 12/02 interest is not included in calculation of Free cash flow ,and is it always the case. Thanks
“Free cash flow” is the cash available for all investors and we never include interest (interest is taken account of by discounting at the WACC, or (in the case of Integrand) by looking at the tax saving on interest separately because it is an APV question).
(On the other hand, if you are asked for “Free cash flow to equity” then this is cash available for shareholders and therefore we do include interest payments)
It is an assumption.
I would not have assumed that – I would have assumed it was recovered at time 6 (and I am confident I would have got full marks doing that 🙂 )
Sir, why is the working capital recovered? I thought that the investment should continue for an unforeseen future, therefore no need to recover the working capital after 6 years.
It is an assumption (and as always in the 50 mark question you are asked to state your assumptions – you still get the marks provided the assumptions stated are sensible).
However it is an assumption that we would normally make (in the same way that we bring in the realisable value of the assets). The fact that the questions states that the realisable value excludes the working capital does suggest that they expected you to bring that in as extra.
Dear Sir,
How do you calculate the Royalty fees payable to Omnikit? I don’t understand how the marking scheme has arrived at Sfr1806.I tried calculating as
(£750000*2.3210)*1.05^2 =1910081Spot rate 2.310 is used because we have to get the equivalent Sfr
1.05^2 is to show inflation.
Where have I gone wrong?
The royalty fee is fixed, and so will not inflate.
The forecast exchange rate in 2 years time (using the purchasing power parity formula) is 2.4084, so it converts to 750 x 2.4084 = 1,806
The forecast exchange rate in 3 years time is 2.4551, so it converts to 750 x 2.4551 = 1,841.
And so on 🙂
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