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hi
i have two questions in relation to Q1i – December 2011.
1) when do we have to start counting the inflation from? year 1 of the project is the end of year 1 and year 0 is day 1 of year one. so why we are not including inflation in year 1 when it comes to calculating variable costs? why do we start in year 2? presumably year 1 should have inflation since its the end of year 1. is that right? can i make that assumption in exam?
2) while calculating the discount rate of 9.6% for npv why are we including tax as 30%? why not 20% since that is the rate in foreign country?
please help
The question specifically says that the costs and revenues apply to the first year of operation. Therefore the do not inflate in the first year – only in the later years.
Please watch my lectures because I make this point in both my AFM and FM lectures (because this is revision of Paper FM (old Paper F9).The interest reduces the taxable profits. Just as the taxable profits end up being taxed at 30% (20% plus the extra 10%), then so too the benefit of the tax saved on the interest will end up being 30%.
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