Allowing for Inflation and Taxation

ALLOWING FOR INFLATION AND TAXATIONQ1. Ethan Co is evaluating Project Z, which requires an initial investment of $45,000. Expected net funds combines are $16,000 per annum for two courses at todays prices. However, these are anticipate to rise by 3.7% pa because of largeness. The firms funds live of bang-up is 11%. Find the NPV by discounting money cash campaigns. (MCQ) categorys currency works ($) Money cash 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 merchandising prices variable costs of complex body part are $200,000 $100,000 respectively and are in current price legal injury before allowing flash of 3%/annum on selling price 4%/annum on variable cost. Fixed cost for the social class is $70,000 before inflation of 2%/annum. Calculate the taxationable cash flows for course 2 and execute in the table given below. (FIB)3714752222 cholecalciferol$ (2 marks)Q3. A aim has th e following cash flows before allowing for inflation. The companys money discount tempo is 13.5%. The general rate of inflation is expected to remain constant at 5%. Evaluate the NPV by using strong cash flows and real discount rates (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 entrust this have on the present harbor of that receipt? (MCQ)ReduceNilCannot sayIncrease(2 marks)Q5. Which of the following about the inflation determine included in the nominal cost of slap-up is correct?The expected general inflation suffered by the investorsThe previous general inflation suffered by the investorsIt is specific historic to the businessIt is expected specific to the business(2 marks)Q6. DC Co. has a thirty- commencement exercise declination year end pays corporation tax at a rate of 24%, 12 months after th e end to which the cash flow relates. It can claim tax allowable depreciation at a rate of 25% reducing balance. It pays $3m for a machine on thirty-first December 20X1. DC Co.s cost of groovy is 10%.At cost of capital 10%, what is the present value on 31st December 20X1 of the public assistance of the first portion of tax allowable depreciation? (MCQ)$750,000$163,620$180,000$148,680(2 marks)Q7. Ghost Co. involve to have $400,000 working capital immediately for the three-year visualise. The amount will brook constant in real terms. Inflation is running at 7% per annum, and Ghost Co.s money cost of capital is 14%. What will be the net present value of working capital? Give closure to the nearest number. (FIB)3708407112000$ (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 paid in arrears. Calculate the capital allowances for year three when the project career is four 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 liability settled in the year in which it arises. The tax allowable depreciation can be claimed on the cost of the investment on a straight stage business basis over the projects life of four years. What will be the equilibrize charge/allowance for the company? (MCQ) $125,000 (Balancing prime)$360,000 (Balancing Allowance)$360,000 (Balancing guidance)$140,000 (Balancing Allowance)(2 marks)Q10.The following information relates to two machines political machine 1 Machine 2Investment $100,000 $50,000 impose allowable depreciation 25% Reducing rest period 25% Reducing BalanceProject Life 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 Balancing 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 $105,000 working capital is call for to be in place at the start of for severally one year equal to 5% of the cash inflow for that year. Cost of capital is 8%. What is the present value of the working capital? (FIB)3714751905000$ (2 marks)Q12. A companys expected 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 taxation for year 1 $150,000, year 2 $ 175,000 & year 3 $120,000. 12% of sales will be required as working capital at the start of each year end. Calculate incremental working capital for year three? (FIB)3714752222500$ (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 aggrandise 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 expecta tion of inflation will have following personal 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 indicant 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 date (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 overdraw year on year, then the inflated amount will be returned at the end of the project.Year Cash flow Increment (7%) Discount agent (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 inf lation (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 $14,400Required WC at end 18,000 21,000 18,000 21,000 14,400 additive (18,000) (3,000) 6,600 14,400Q14. DYear Inflated Sales ($) Working Capital ($) Incremental WC ($) Discount cypher (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)