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CBS Co
CBS Co is considering a new investment which would start immediately and last four years. The company has gathered the following information:Asset cost – $160,000
Annual sales are expected to be 30,000 units in Years 1 and 2 and will then fall by 5,000 units per year in both Years 3 and 4. The selling price in first-year terms is expected to be $4.40 per unit and this is then expected to inflate by 3% per annum. The variable costs are expected to be $0.70 per unit in current terms and the incremental fixed costs in the first year are expected to be $0.30 per unit in current terms. Both of these costs are expected to inflate at 5% per annum.
The asset is expected to have a residual value (RV) of $40,000 in money terms.
The project will require working capital investment equal to 10% of the expected sales revenue. This investment must be in place at the start of each year.
Corporation tax is 30% per annum and is paid one year in arrears. 25% reducing balance writing-down allowances are available on the asset cost.
General inflation is 4% and the real cost of capital is 7.7%
$12,000 has already been spent on initial research.Required: Calculate the NPV of the proposed investment.
In this question from technical article
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/advanced-investment-appraisal.htmlthe project is to be started immediately, which led me to believe that the project would start at times 0 hence It messed up all of my calculations. So when they say immediately are we to assume that it means after 1 year i.e T1 and not T0 because I costed the revenue and costs at T0. or is this question an exception, because I found the wording very confusing.
Thanks in advanceThink,,,,of it this way
To means today. T1 is the last day of this year
So To start and T1 end
Think…. how can you have revenues in advance… At T0?I have understood the timing after solving a couple of questions that all flows occur at T0 but we include them in T1 because we want to discount the flows at COC to get the present value. I was originally confused and thought that the flows took place throughout the year, as it happens in real life but according to the exams we are to assume they all occur at the end of each year for discounting purposes hence we are given yearly discount rates in the exam. So do we ever deal with flows arising throughout the year in ACCA? or are we just tasked with understanding the concept?
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