question 4 past exam jun2008 Sc CO Npv calucaltion

Salam al likum Alraymi,

Your question is not very well phrased and I can only hazard a guess at what you are trying to ask me!

(1) The examiners solution does use a tax rate of 30%
(2) You do not have to treat the Capital Allowances exactly the same way as the examiner has done. .. You could have chosen to deduct the Tax Relief on the Capital Allowances from the TAX PAYABLE in your “Table of Operating Cash Flows” and you will arrive at the SAME NET tax payable.

Your NPV figure of $91,154 will still work out the same as the examiners, bUT you will have only shown ONE line of capital allowances in your answer and not two lines, as the examiner has done.

Hope this helps, Kevin

The question says that the working capital need to be 7% of the sales revenue for that year.

In year 1, the revenue is 728,000. So the working capital at the start of that year (time 0) must be 7% x 728,000 = 50,960

In year 2 the revenue is 1146390. So the working capital at the start of that year (time 1) must be 7% x 1146390 = 80,247. However they already have 50960, so the extra outflow needed at time 1 = 80247 – 50960 = 29287

In year 3, the revenue is 1687500. So the working capital at the start of that year (time 2) must be 7% x 1687500 = 118125. However they already have 80247 in total, so the extra outflow needed at time 2 = 118125 – 80247 = 37878

In year 4, the revenue is 842400. So the working capital at the start of that year (time 3) must be 7% x 842400 = 58968. However they already have 118125 in total. So there is an inflow at time 3 of 118125 – 58968 = 59157.

At time 4, the project finishes and so the remaining working capital of 58968 is recovered.

I am please it helped you 🙂