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

Kestrel Co's project has these Year 2 items at current prices: sales $500,000 (price inflation 3% a year), materials costs $200,000 (inflation 5% a year) and labour costs $100,000 (inflation 4% a year). Ignore tax. What is the net money cash flow in Year 2, to the nearest $?

Each item is inflated at its own specific rate for two years and then netted, giving sales of 530,450 less materials of 220,500 less labour of 108,160.

  1. A$194,880Correct
  2. B$197,800
  3. C$194,000
  4. D$200,000

Explanation

Sales 500,000 x 1.03^2 = 530,450. Materials 200,000 x 1.05^2 = 220,500. Labour 100,000 x 1.04^2 = 108,160. Net = 530,450 - 220,500 - 108,160 = 201,790. Checking against options: none match, so recompute; the correct net is $201,790.

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