Exchange rate 6

Question 1

The investment and depreciation schedule is prepared This table includes all investment data. The prices should be expressed in nominal terms. This table serves two purposes.

Answer 1

The first is to determine the depreciation expense that will be included in the income tax statement that is used to determine the income tax liability.

The second purpose is to develop residual values for the project’s assets. These are typically based on economic rates of depreciation for depreciable assets.

Question 2

The economic rate of depreciation will be applied to the value of the asset in the year it

Answer 2

was acquired

Question 3

The financing schedule typically includes all the loans by date of disbursement. Repayments of financing cost are estimated using

Answer 3

nominal interest rates

Question 4

The loan and repayment flows are then converted into

domestic currency using the

Answer 4

nominal exchange rates.

Question 5

If the project is to pay taxes,

Answer 5

First, an income statement construct

second cash flow statement construct

Question 6

income tax statement include

Answer 6

1. costs of goods sold,
2. depreciation and amortization expenses,
3. overheads,
4. interest expense

Question 7

cash inflows or reciepts

Answer 7

sales,
accounts receivable
residual values of the project’s assets

Question 8

All receipts

Answer 8

inclusive of VAT and other sales taxes are added up for each year to determine annual cash inflows

Question 9

All expenditures are

Answer 9

added up for each year to determine annual cash outflows.

Question 10

Nominal expenditures are broken down into X and included in the cash flow statement. If the project is
using any existing assets the Y of these assets should be included with the investment expenditures.

Answer 10

investment expenditures and operating expenditures

opportunity cost

Question 11

VAT paid on purchases

Answer 11

can be claimed as input tax credit

Question 12

the amount of VAT collected in excess of input tax credit should be

Answer 12

deducted as a cash outflow from the project

Question 13

from the owner’s point of view is constructed
by adding the X as inflows and Y as outflows to the cash flow statement estimated from the viewpoint of total invested capital

Answer 13

debt

interest and principal repayment

Question 14

The increased investment expense has three effects

Answer 14

First, it increases the interest costs of the project.

Second, it increases the nominal amount of loan principal (50% of nominal investment costs) which must be repaid by the project.

Finally, it results in a larger nominal depreciable expense that will be deductible from future taxes

Question 15

investment financing normally take place

Answer 15

in year 0 and sometimes in year 1 also

Question 16

A commercial enterprise will need to maintain an amount of cash on hand that is related to the

Answer 16

value of sales and purchases they carry out.

Question 17

an “inflation tax” on cash holdings

Answer 17

The resulting loss in the purchasing power of cash balances is referred to

Question 18

project evaluators should incorporate a number of inflation projections in order to determine the

Answer 18

sensitivity of total costs to the impact of inflation on the cost of holding the desired level of real cash balances.

Question 19

In the inflation condition, the PV fall because

Answer 19

inflation causes the real value of outstanding trade credit to fall

Question 20

In the inflation condition, account receivables

and account payables condition

Answer 20

1 try to reduce length: othereise increase of selling price.

2 try to more delay or increase length: real value of the obligation is falling during the period of time prior to the payment.

Question 21

nominal value of purchase in time of inflation

Answer 21

increase

Question 22

ACC payable nominal expenditures

Answer 22

purchase + change in account payable

Question 23

ACC real expenditure

Answer 23

nominal expenditure / PI

Question 24

inflation reduces the future value of both the

Answer 24

loan repayments and real interest rate payments

Question 25

real cash flow
without inflation
loan

Answer 25

loan principal + interest + repayment

Question 26

the higher nominal interest rate increases the but decreases the

Answer 26

cash outflows,

value of the principal that is due at the end of the project

Question 27

effect of inflation on tax

Answer 27

the higher interest payments shown in the previous section ( in condition without inflation) increase the amount of tax deduction.

Second, inflation reduces the value of the depreciation allowances taken for earlier investments in the project and tax saving fall.

Finally, the method used to account for inventory has an effect on the nominal earnings that are used to determine the taxable income

Question 28

interest payments are deductible from income for the calculation of taxes, while principal repayments are

Answer 28

not deductible

Question 29

The higher nominal interest payments are

Answer 29

deductible from taxable income, hence they serve to reduce the amount of taxes

Question 30

The higher nominal interest rate and higher inflation forces the project to

Answer 30

repay its loans faster than if the inflation rate and nominal interest rates were lower but PV remain same

Question 31

Real Tax Savings without inflation

Answer 31

dep for each period * tax rate

Question 32

a first-in-first-out basis (FIFO)

Answer 32

price of the oldest inventories (first in) is the value which is used to determine the cost of the goods sold (COGS).

Question 33

This means that the difference between the X

and Y the is the taxable revenue from the project.

Answer 33

COGS

sale price

Question 34

sale prices are affected immediately by the rate of inflation, while the X from inventories are valued using prices of a previous period when the nominal prices were presumably lower.

Answer 34

costs of goods sold

Question 35

Comparing the effects of inflation on the tax liability in the FIFO and LIFO accounting systems, we see that in both cases, inflation

Answer 35

increased the taxes

Question 36

Using FIFO, inflation increased the taxes in X period, whereas using LIFO results in no increase in taxes in the Y but in a larger tax liability in the z

Answer 36

each
production period
last sales period

Question 37

Using LIFO could increase the X associated
with the project in a high inflation environment if the reason for the enterprise wanting to Y was financial stress or business slow down

Answer 37

overall risk

lower the level of inventories