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Dear John, BBP practice and kits question 57 Warden Co.
in question b, sale revenue was calculated like that 100,000x$16x 3.696=$5,913,600 (i understand that), and then 5,913,600x 30%=$1,774,080, then discounting by one year to give PV of tax liability 1,774,080×0.901=$1,598,446, total PV relating to sales revenue=$5,913,600-1,598,446=$4,315,154.
my question : firstly why they calculate sale revenue like this {sale revenue= quantity X price X (1-30%)}. price – variable cost =contribution, (price -variable cost) X quantity -fix cost =gross profit, how about price X quantity – tax liability=? sale revenue?
secondly $1,774,080 is already present value calculated from present value 5913,600, why discounting to one year to give PV of tax liability?
many thanksFirst question:
The sales revenue has been calculated as price x quantity. (Subtracting the variable and fixed costs is needed to get the cash flows which we need to get the NPV).
Second question:
The tax is payable one year in arrears and therefore it needs discounting for one extra year.
(Thirdly, it seems that you are using a past edition of the Revision Kit. This is not a problem, but be aware that the format of the exam has not changed and there will be more MCQ’s and fewer long-form questions. You can find a specimen exam on the ACCA website.)
thank you for your help, but the first question is that they didn’t minus any variable cost and fixed cost just less tax liability, i mean question was asked sale revenue sensitivity, using NPV/ Sale revenue.
many thanksIt is easiest if I explain with a little example.
Suppose the revenue is 100 and the costs are 40 – so an operating flow of 60.
If the tax is 30% then the tax is 18, leaving a net 42.Now suppose the price goes down by 10% to 90. Costs stay at 40 so an operating flow of 50. Tax is now 15 leaving a net 35.
So……a change of $10 in revenue means a change of $7 in the net flow.
(and we could have calculated that by simply taking the revenue x (1-t) )
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