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Hi sir,
Something needing clarification here..
Came across this question in Becker study question bank.
(i) can i know is it we just simply assume that the redundancy costs will take place in T0…cos no timing mentioned in the question with regards to this cost…
(ii) can i know why the direct labour saved is subjected to inflation of 6% in T1…?…shouldn’t it the inflation only affect T2 figures…?
thanks…~
(i) It is an assumption but the only sensible assumption. If they buy the machines today then they will surely make the workers redundant today – there would not be much point in waiting.
(ii) The costs given are at current prices (we have not bought the machine yet). So next year they will be higher by inflation.
If they did not retrain the remaining workers straight away, then how could they use the new machines? 🙂
They will save 25% of the direct labour.
At current prices, the saving will be 25% x ($1.80 + $2.30) x 250,000 units = $256,250.
This is inflated at 6% per year.
Sir, another question is why jack and garden tool used different Discount factor rather than the adjusted Discount factor??
thanks in advance
Because we are looking up the discount factors for different rates.
The reason we need to use different rates is that the two different activities carry different levels of risk.
So we need to know the two separate betas and from there calculate the relevant costs of equity and therefore WACC’s.
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