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i want to know how is component cost,working capital has bee iniitially 35 is given but from year1 to 5 how calculated as 4,3,3,44 ? and why working capital is not released at the end of year 5 or year 6, and also how has been depreciation has been calculated
year 0 1 2 3 4 5
component 51 52 54 55
working capital 35 (4) (3) (3) (4) (4)
depreciation 17 17 17 17
also want to know the answer in licensing from where the incremental cash flow from machinery came ,staff cost and lost export from tax has been calculated?
year 1 2 3 4 5
incremental cash flow
from machinery 1.o
staff cost (0.21) (0.22) (0.22) (0.23)lost export after tax (0.51) (0.53) (0.55) (0.56)
1. The working capital is there to cover things like receivables, inventory etc. Surely, because of inflation, there working capital will need to be increased each year. The extra amounts are to cover for the extra inflation.
2 Why do you say that the working capital is not released at the end of the project? The question specifically says that at the the end of 5 year the realisable value is 150M INCLUDING working capital.
3 Again, the question specifically states that the ‘tax allowable depreciation’ is calculated on a straight line basis at 25% per year (i.e. 25% of cost)
4 The incremental costs come from comparing the costs with licensing with the costs without licensing (incremental means extra)
i have compared the question of daron Dec 95 and partsea plc jun07, in both case there is inflation ,but while calculating cost of equity using CAPM only in the case of Draon it has adjusted inflation
in the case of Daron while calculating wacc and calculating cost of equity it ahs done as follows
the risk free rate including the inflation ,given the inflation of 5% per year is
(1.04) (1.05)=1.092=9.2%
the market return including inflation at 5% per annum is
(1.1) (1.05)=1.155=15.5%I would like to know why this has not done in the case pf partsea even though there is inflation in the case of partsea plc
In Daron, the question gives you the real risk-free and the real market returns.
When we are discounting the nominal (actual) cash flows we should always use the actual (nominal) cost of capital.In Partsea it does not say that they are the real returns, and we always assume (unless told different) that the returns given are the nominal returns.
Hi,
Further to the above, can you please tell me how the component cost is calculated in this particular question? I am breaking my head trying to understand this but I still couldn’t.
The component costs as per the answer are
Year 2: 51
Year 3: 52
Year 4: 54
Year 5: 55How were these calculated? Thanks
Production in year 2 is 2.5M units.
Cost in Bt’s is 2.5M x 5 = 12.5M Bt’s.
The forecast $H/Bt for year 2 is $H/Bt 4.05
So the cost in $H is 12.5 x 4.05 = 50.625 (51)
Similarly at time 3, the cost is 12.5 x 4.17 = 52.125 (52)
and so on 🙂Hello John,
From the last part of the FDI, how do we arrive at the figures for extra tax and the remittables from B ?
The tax in year one in Hotternia was $H 10M.
This was calculated at 20%.
The tax in the UK is 30%, and so an extra 10% is payable.
So the extra tax payable is 10/20 x $H10M = $H 5M
Convert this at the year 1 exchange rate: $H 5M / 17.04 = 0.30M GBP.
Same for the other years 🙂Remittable at time 1 = $H 101M. Convert at the year 1 exchange rate gives 101M / 17.04 = 5.93M GBP
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