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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.
Inflation 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 🙁
The 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.
hi
in this same question i dont get the royalty part … why are we deducting it first and then adding it back below ?Because 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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