Skip to content

ACCA Applied Skills · Financial Management · Allowing for inflation and taxation in DCF

Brindle Co expects a project to generate sales revenue of $200,000 in Year 1 at current prices. Selling prices are expected to rise by 4% a year. The money cost of capital is 10%. What is the money cash flow from sales in Year 3, to the nearest $?

The Year 3 money cash flow is $224,973. Current-price revenue of $200,000 is inflated at 4% for three years, multiplying by 1.04 cubed, which is 1.124864. Using only two years of inflation understates the figure, because the current-price base is treated as Year 0.

  1. A$224,973Correct
  2. B$216,320
  3. C$200,000
  4. D$260,000

Explanation

Year 3 money flow = 200,000 x 1.04^3 = 200,000 x 1.124864 = $224,973 (rounded). Using 1.04^2 gives $216,320, which treats Year 1 values as the base year with inflation starting a year late. Applying no inflation gives $200,000.

Did you get it right without looking?

One question tells you little. A timed set on Allowing for inflation and taxation in DCF shows your real accuracy, how long you take and where you lose marks.

Practise Allowing for inflation and taxation in DCFFree diagnostic mock

More Allowing for inflation and taxation in DCF questions