Allowing for Inflation and Taxation

ALLOWING FOR INFLATION AND TAXATIONQ1. Ethan Co is evaluating Project Z, which requires an initial set upment of $45,000. Expected sack bullion flows are $16,000 per annum for two socio-economic classs at todays prices. However, these are expected to rise by 3.7% pa because of inflation. The firms m unitaryy damage of pileus is 11%. Find the NPV by usher outing money property flows. (MCQ)Years property flows ($) money property flows ($)0 (45,000) (45,000)1 16,000 1.037 16,5922 16,000 (1.037)2 17,206$(11,202)$(13,000)$16,079$(16,079)(2 marks)Q2. Philip Co.s selling prices variable costs of construction are $ two hundred,000 $100,000 respectively and are in actual price terms before allowing inflation of 3%/annum on selling price 4%/annum on variable cost. Fixed cost for the twelvemonth is $70,000 before inflation of 2%/annum. Calculate the levyable cash flows for yr 2 and fill in the table given below. (FIB)3714752222 five hundred$ (2 marks)Q3. A project has the fol lowing(a) cash flows before allowing for inflation. The companys money discount rate is 13.5%. The customary rate of inflation is expected to remain unvaried at 5%. Evaluate the NPV by using real cash flows and real discount evaluate (MCQ)Year Cash flow ($000)0 (600)1 2402 500$31,000$36,300$51,000$53,500(2 marks)Q4. GW Co. is expecting a net of tax receipt of $8,000 (in real terms) in one years time. If GW Co. expects inflation to increase, what impact allow for this have on the stick in value of that receipt? (MCQ)ReduceNilCannot sayIncrease(2 marks)Q5. Which of the following somewhat the inflation values included in the nominal cost of hood is correct?The expected general inflation suffered by the investorsThe previous general inflation suffered by the investorsIt is item historic to the businessIt is expected specific to the business(2 marks)Q6. DC Co. has a 31st December year end pays corporation tax at a rate of 24%, 12 months after the end to which the cash flow re lates. It can claim tax allowable dispraise at a rate of 25% simplification balance. It pays $3m for a machine on 31st December 20X1. DC Co.s cost of upper-case letter is 10%.At cost of capital 10%, what is the present value on 31st December 20X1 of the benefit of the first portion of tax allowable depreciation? (MCQ)$750,000$163,620$180,000$148,680(2 marks)Q7. Ghost Co. needs to have $400,000 working capital immediately for the three-year project. The amount give stay invariant in real terms. Inflation is running at 7% per annum, and Ghost Co.s money cost of capital is 14%. What will be the net present value of working capital? Give suffice to the nearest number. (FIB)3708407112000$ (2 marks)Q8. The investment is $200,000 the capital allowances will be calculated on the basis of 25% reducing balance basis. The tax rate is 27% which will be salaried in arrears. Calculate the capital allowances for year three when the project life is foursome years? (MCQ)$13,500$10,125$7,594$ 22,781(2 marks)Q9. Joseph a project manager plans to invest $500,000 in a new project. His company pays a corporation tax of $28% per annum with tax indebtedness settled in the year in which it swots. The tax allowable depreciation can be claimed on the cost of the investment on a straight line basis over the projects life of four years. What will be the balancing charge/allowance for the company? (MCQ) $125,000 ( balance press)$360,000 (Balancing perimeter)$360,000 (Balancing Charge)$140,000 (Balancing Allowance)(2 marks)Q10.The following information relates to two machines railway car 1 Machine 2Investment $100,000 $50,000Tax allowable depreciation 25% Reducing Balance 25% Reducing BalanceProject spirit 2 years 2 yearsScrap value $50,000 $50,000Capital Allowance start Year 0 Year 1The corporation tax rate is 30%. State whether Balancing Allowance or Charge will arise for Machine 1 Machine 2. (MCQ)M1 Balancing Charge / M2 Balancing AllowanceM1 Balancing Allowance / M2 Balancin g ChargeM1 M2 Balancing ChargeM1 M2 Balancing Allowance(2 marks)Q11. A project has the following projected cash inflowsYear 1 $50,000Year 2 $75,000Year 3 $105,000 working(a) capital is required to be in place at the start of each year capable to 5% of the cash inflow for that year. Cost of capital is 8%. What is the present value of the working capital? (FIB)3714751905000$ (2 marks)Q12. A companys expected gross sales for the new venture to be 10,000 units per year. The selling price is expected to be $5 per unit in the first year, inflating by 4% per year over the three year life of the project. Working capital equal to 8% of annual sales is required and needs to be in place at the start of each year. Calculate the working capital increment needed in year 2? (MCQ)$(4,160)$(160)$4,480$0(2 marks)Q13. Tec Co. is planning to invest in a three-year project having following details Revenue for year 1 $150,000, year 2 $175,000 & year 3 $120,000. 12% of sales will be required as worki ng capital at the start of each year end. Calculate incremental working capital for year three? (FIB)3714752222500$ (2 marks)Q14. Working capital of each year is 3% of sales which will be required at the start of each year. The sales will dilate by 2% per year and the sales are as followsYear 1 $300,000Year 2 $445,000Year 3 $267,700Calculate Present value using cost of capital of 4%. (MCQ)$(4,271)$5,023$7,281$(1,147)(2 marks)ALLOWING FOR INFLATION AND TAXATION (ANSWERS)Q1. DMoney cash flows ($) Discount rate (11%) Present value ($)(45,000) 1 (45,000)16,592 0.901 14,95017,206 0.812 13,971NPV (16,079)Q2. $31,000Costs Inflation Year 2 ($000)Sales Revenue 200 (1.03)2 212Variable Cost 100 (1.04)2 (108)Fixed Cost 70 (1.02)2 (73)Taxable cash flows 31Q3. CReal rate (1+ 13.5%) (1+ 5%) 1 = 8%Year Cash flow ($000) Discount factor 8% Present value ($000)0 (600) 1 (600)1 240 0.926 2222 500 0.857 429NPV 51Q4. BHigh expectation of inflation will have following effectsHigher nominal discount rateHigh expected nominal cash flowExact cancellation of each otherQ5. AThe inflation included in the nominal cost of capital is required by the investors to compensate them for the loss of general purchasing power their money will suffer in the future as a result of investing in the business.Q6. $163,620The asset is purchased on 31st December 20X1, so the first portion of tax allowable depreciation is accounted for on the duration (as this the year-end). The amount of depreciation would be $3m 25% = $750,000.Claiming this allowance will save ($750,000 24 %=) $180,000 tax when it is paid one year in arrears hence the $180,000 0.909 (DF 10%) = $163,620Q7. $ 138,472The working capital required will inflate year on year, then the inflated amount will be returned at the end of the project.Year Cash flow growing (7%) Discount Factor (14%) Present Value0 (400,000) (400,000) 1 (400,000)1 428,000 (28,000) 0.877 (24,556)2 457,960 (29,960) 0.769 (23,039)3 0 457,960 0.675 309,123NPV -138 ,472Q8. CYear Working Capital Allowance Tax Benefit1 (200,000 25%) 50,000 27% 13,5002 (150,000 25%) 37,500 27% 10,1253 (112,500 25%) 28,125 27% 7,5944 84,375 27% 22,781Balancing Allowance/Charge (Year 4)200,000 (50,000+37,500+28,125) = 84,375 (Balancing allowance)Q9. B$500,000 4 years = $125,000$125,000 28% (tax rate) = $35,000$35,000 4 years = $140,000$500,000 $140,000 =$360,000 (Balance Allowance)Q10. BMachine 1Year 0 100,000 25% 25,000 30% 7,5001 75,000 25% 18,750 30% 5,6252 100.000 (25,000+18,750) = 56,250 50,000 = 6,250 6,250 30% 1,875 (B.A)Machine 2Year 0 1 50,000 25% 12,500 30% 3,7502 50,000 (12,500) = 37,50037,500 50,000 = (12,500) (12,500) 30% (3,750) (B.C)Q11. $ -868Year Cash flow ($) Increment (5%) Discount factor (8%) Present value ($)0 2,500 (2,500) 1 (2,500)1 3,750 (1,250) 0.926 (1,158)2 5,250 (1,500) 0.842 (1,263)3 0 5,250 0.772 4,053-868Q12. BYear Selling price inflation (4%) Working capital ($) (8%) Increment (5%)0 4,160 (4,160)1 $5.2 10,000 = 52,000 4,320 (160)2 $5.4 10,000 = 54,000 4.480 (160)3 $5.6 10,000 = 56,000 4,4800Q13. $14,400Year 0 1 2 312% of Sales revenue $18,000 $21,000 $14,400Required WC at end 18,000 21,000 18,000 21,000 14,400 incremental (18,000) (3,000) 6,600 14,400Q14. DYear Inflated Sales ($) Working Capital ($) Incremental WC ($) Discount Factor (4%) Present value ($)0 9,180 (9,180) 1 (9,180)1 306,000 13,620 (4,440) 0.962 (4,271)2 454,000 8,190 5,430 0.925 5,0233 273,000 8,190 0.889 7,281NPV (1,147)