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First, thank you for your lectures. They’ve been extremely helpful.
In the ACCA article, Advanced Investment Appraisal, I do have some boggling issues.
1. Units Produced
The scenario describes that the estimated units to be produced in years 3 and 4 are expected to fall by 5,000 per year. Then shouldn’t the estimated sales unit for years 3 and 4 be 25,000 units equally? Rather than 25,000 and 20,000 units respectively as treated in the answer?
2.Working Capital (WC)
In your lectures, we assumed as a rule that WC at time 0 should be the same at the end of the project.
The scenario describes WC as 10% of expected sales, but the answer considered some things I don’t understand.
Pardon me if I might have misunderstood you.
1. The fall in the sales units is ambiguous and could be read either way. The one time that the examiner had wording like this, he realised that it could be read in two ways and gave full marks for reading it either way (ever though the answer was obviously different).
Because he realised there was a problem, I would expect him to always be more clear these days.
2. The working capital recovery is always the total of the working capital previously invested (and is in this example). What is happening here is that because they need the total working capital at the start of each year to be 10% of the sales revenue, the total needs adjusting each year (a bit more or a bit less) to make sure it is always 10% of the revenue.
Thank you, John.. You’re the best!
You are welcome 🙂