P4 DEC 08

The construction cost was 6.2M. Property prices are inflating by 8% in real terms and so since general inflation is 2.5% it means that the actual inflation in money terms is (1.08 x 1.025) - 1 = 0.107 (or 10.7%). So the value after 5 years will be 6.2M x (1.107^5) = 10,306,941 The charge for repairs and renewals is 1.2M at current prices. There is general inflation at 2.5%, and so the actual money cost is 1.2M x (1.025^6) = 1,391,632 So the net cash inflow is 10,306,941 - 1,391,632 = 8,915,309

Sorry I still do not know why 1.2M is not consider the 8%growth rate? Only consider inflation rate. Thanks

Because the 1.2M is at current prices and the general rate of inflation is 2.5% - there is no mention of any other reason why it should grow (as there is in relation to property prices).

I see. thanks sir!

You are welcome :-)

Sir I have another question in JUNE 09. In question 1, I do not understand the answer why they calculate the unclaimed capital allowance? I know the question states that the unclaimed CA does not included. But in calculating the unclaimed CA the answer also deducted the proceeds. However, this proceeds has already included in the post tax cash flows. Could you please explain the reason behind it! Thanks ahead.

In future, please start a new thread when it is a new question. The unclaimed capital allowance (i.e. the balancing allowance) is always calculated as the difference between the tax written down value and the sale proceeds. This is purely a tax calculation. I don't know whether or not you sat F6 (UK) and whether you took (or were exempted from) F9, but the free Paper F9 lecture on investment appraisal with tax will help you.

I will start a new thread in the future. Just as from you answers. So if the question give us a proceeds or residual value, we should calculate the tax benefits right? Thanks

Yes - unless obviously the question says differently, then there will always be a balancing allowance or a balancing charge.

Sorry sir. I just want to make clear about this question In JUNE 08 question5. Should we calculate the balancing allowance? But the answer just add the residual value(40), do not calculate this one? What difference between this two question? Thanks.

In this question there is a balancing charge (2.67). The examiner has shown it in a confusing way (it was the previous examiner) but it is there.

You make a clear explanation. I understand finally. Thanks. Sir. The last one is for the balancing allowance we should consider it all the time unless examiner tells not do that. Also it should be put in the year after the end of project year! Am I right?

Yes to both questions (but read carefully in case the question says to do different :-) )

In what situations we do not need to consider the balancing charges? Could you please give a example? Thanks!

There is always going to be a balancing allowance or balancing charge, unless the question says to ignore it.

I got it. thanks for your clear explainations.

You are welcome :-)