Hi John, I am trying to solve this question but stumped at a (silly) point really. I can't figure out how the model answer is deriving the value of 803 euros for year 3 selling price as inflating by the EU inflation rate of yr 3 onwards -> (700)(1.04)^(3)=787
Your help to clear my confusion is much appreciated!
Thank you.
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Yilandwe Co June 2015 P4
9y ago#1Inflation is 5% in the first 2 years and then 4% in the third year.
So the selling price is 700 x 1.05 x 1.05 x 1.04 = 803
Thank you for the prompt response John :) Also looking at the model answer, they have added back the capital allowance figures and loss carried fwd once the tax @40% has been calculated. I am confused as to why this is the case. Thanks.
Also, while working out the working capital figures, I don't understand how the model answer derives the value of 1,316(yr 3) and 14,750(yr4). Thank you.
Actually, I have figured out the working capital calculations-exam revision stress is clouding my numerical judgement :(
9y ago#5The capital allowances were deducted in order to get the taxable profit and therefore the tax amount. They are then added back because they are not a cash flow.
Thank you John :D
9y ago#7You are welcome :-)
hi
in this same question i dont get the royalty part ... why are we deducting it first and then adding it back below ?
9y ago#9Because it is an expense in Yilandwe (which therefore affects the tax payable in Yilandwe and also the remittances to the USA, which need converting in to $'s).
As far as the US company is concerned, the get the remittances from Yilandwe plus the royalties that they receive.
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