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PRYSOR CO (JUN 2022)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › PRYSOR CO (JUN 2022)

  • This topic has 12 replies, 2 voices, and was last updated 3 months ago by John Moffat.
Viewing 13 posts - 1 through 13 (of 13 total)
  • Author
    Posts
  • May 31, 2023 at 12:53 am #685538
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Hi Sir,
    I really am unable to understand how did they perform the sensitivity analysis in (b)(iii). I’ve watched your lecture on this topic still didn’t understand what approach has the examiner followed, and why.

    May 31, 2023 at 8:50 am #685573
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    It is the normal approach.

    The question effectively asks for the sensitivity of the sales revenue, so you calculate the PV of the sales revenue (less the tax on the sales revenue), which is 11,683 (as shown in appendix 2). (It is only these flows that would change, all the other flows are not affected).

    You already know the NPV of the project which is 959 (from appendix 1).

    So the sensitivity of the revenue is 959/11,683 x 100%

    May 31, 2023 at 10:28 am #685582
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    If we have to calculate the sensitivity of the Sales Revenue then why do we need to subtract tax?

    May 31, 2023 at 4:40 pm #685630
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    Because for every $1 that the revenue changes there will be $1 change in profit and therefore a change in the tax. So we need to consider the after-tax revenue.

    May 31, 2023 at 6:38 pm #685658
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Okay, now it makes sense!
    Thank You!

    May 31, 2023 at 10:39 pm #685725
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Sir, could you please explain it in case of sensitivity to Tax Rate? This is not related to the question but in general a doubt!
    Why is tax adjusted with depreciation while calculating the sensitivity to Tax Rate?

    June 1, 2023 at 7:58 am #685778
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    I am not sure that I understand what you are asking. However tax is calculated on the net cash flow after subtracting the tax allowable depreciation.

    June 7, 2023 at 5:51 am #686288
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Hi sir, if we want to perform sensitivity analysis on Costs, will we follow the same procedure as we did in Sales?
    Variable Costs * (1 – t)?

    June 7, 2023 at 6:43 am #686313
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    Yes 🙂

    June 7, 2023 at 9:21 am #686330
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Okay, thank you sir.
    Also, I was unable to understand the sensitivity analysis for IRR.
    Could you please be able to explain in brief?

    June 7, 2023 at 5:36 pm #686381
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    There is no such thing as the sensitivity of the IRR.

    It is the sensitivity of the cost of capital that could be asked.

    The IRR is the discount rate that, by definition, gives a NPV of zero.

    So the sensitivity of the cost of capital is the (cost of capital – the IRR) / cost of capital, expressed as a %.

    June 7, 2023 at 6:46 pm #686392
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    Okay, thanks a lot!

    June 8, 2023 at 8:32 am #686458
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53174
    • ☆☆☆☆☆

    You are welcome

  • Author
    Posts
Viewing 13 posts - 1 through 13 (of 13 total)
  • The topic ‘PRYSOR CO (JUN 2022)’ is closed to new replies.

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