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There is a question in march/june specimen paper Q32 Pink CO.
I am having difficulty with [(ii) Real terms appraisal of the investment project] requirement of the question where the general rate of inflation is expected to be 3.7% per year which I think is going to be used to calculate.
This is what I did to calculate real cash flows before tax for the first year:
Sales ($000):
Yr 1 : 300,000 units x ($125 x 1.037) = 38887Variable cost ($000):
Yr 1 : 300,000 units x ($71 x 1.037) = 22088Fixed cost ($000):
Yr 1 : $3000,000 x 1.037 = 3111Now, the real cash flows before tax for the first year is 13,688 which is close to the answer in the sample paper 13,643. Please correct me if there is something wrong!
Which years March/June exam are you referring to? (There is no question called either Plot or Pink in the 2020 March/June sample).
It is March/June 2019 question no. Q32 Pink Co here is the link https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/fm-2019-marjun-sample-a%20updated.pdf
I’m sorry about the heading it says Plot co although it is Pink Co.
To get the nominal (actual) cash flows in part (a) we inflate at the actual rate of inflation for each of the flows (so sales inflate at 5%, variable costs at 3.5%, and fixed costs at 6%).
For part (b), to get the real cash flows (i.e. without inflation) we take the nominal flows from part (a) and remove the general rate of inflation of 3.7%. (So the real cash flow before tax at time 1 is 14,148 / 1.037 = 13,643, at time 2 is 24,097 / (1.037^2) = 22,408, and so on)
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