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For part a (ii) to calculate the real NPV of the project.
I calculated PV of future cash flows by real figures from the forecast in the question without adding the inflation. Including the Revenue, Variable Cost, Fix Cost, Tax on Opperating CFs, Tax Saved on Captial Allowance. When I have After-tax CFs without inflation, I used discount tables for real rate of 8% and the result NPV = $50,288 (different with the answer on the book).
1. Please advise me why I can not use real Cash Flows discounting by real cost of capital rate to have real NPV?
2. In the answer they used deflation factor as (1 +0.0.37)^-n. I think there is typo in the answer. How come a number is “0.0.37” and also where is this number from the question?
Thank you so much!!!
To get the real cash flows we need to remove the general rate of inflation from the nominal cash flows. The general rate of inflation is given on the last line of the question as being 3.7%.
But why we inflate them then we have to deflate them to find the real CFs. I mean why don’t just use CFs before we inflate and discount by the real rate provided?
I calculated PV of future cash flows by figures from the forecast in the question without adding the inflation (Including the Revenue, Variable Cost, Fix Cost, Tax on Opperating CFs, Tax Saved on Captial Allowance) When I have After-tax CFs without inflation, I used discount tables for real rate of 8% and the result NPV = $50,288 (different with the answer on the book).Because they inflate at different rates to the general rate of inflation. It is the general rate of inflation that we remove.
Thank you so much John!!!! I’ve watched all of your lectures. If I remember correctly, you didn’t mention about deflation factor so I guessed this type of question is not so common in the test right? I think I should go watch your lectures again. Watch the series one time maybe not enough to remember everything.
I have a question, while calculating Premium for IGR and Options, Numbers of the Contract needed?
thuyly134: You are correct in that it is not very common – it has only been asked the one time
🙂opeyemi20: Why are you asking this here? Your question has nothing to do with the topic in this thread. If asking about a different topic you must start a new thread.
I guess you mean IRG (because there is no such thing as IGR) in which case there is no premium. As far as options are concerned, you cannot be asked calculations on options in Paper FM – you can only be tested that you understand what they are. This is all explained in my free lectures – the lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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