ICAEW FM: Financial Management
Exam Notes and Proformas
, · Interest cost is never included in investment appraisals as its included in the cost of capital (i.e., discount factor)
· Depreciation is not included in NPV schedules: it’s a non cash item
· Always check if figures are presented in real terms or money terms (i.e., inflated)
· Anything that its allocated is never relevant -> don’t include in NPV
· Irrelevant figures (i.e., paid either way) are not included in NPV
· Any tax allowable costs are deducted from revenue -> lower profit -> hence lower tax on profit charge
· Contribution = Profit
NPV proforma
T0 T1 T2 T3 T4
Investment (X)
Machinery X
Variable costs (W2) (X) (X) (X) (X)
Fixed costs (additional) (W2) (X) (X) (X) (X)
Sale proceeds (W2) X X X X
Tax on profit (W2) (X) (X) (X) (X)
Tax saving WDA (W1) X X X X
Working Capital (W3) (X) (X) (X) (X)
Cashflows (X) X X X X
2 way for the NPV:
(1) NPV excel formula
NPV = (DF%, T1-T4)+T0
(2) Find each period's PV and sum
DF X X X X X -> as calculated in W4
PV Cashflow 0 *DF Cashflow 1 *DF Cashflow 2 *DF Cashflow 3 *DF Cashflow 4 *DF
NPV = SUM of PVs
, Standard Workings
W1: Capital allowances
CT @ x%
Year 1 X
WDA (X) X
Year 2 X
WDA (X) X
Year 3 X
Disposal X <- no WDA in year of disposal
(X)/X X/(X)
Remember:
- If bought near year end -WDA eligible
- If bought at start of year -WDA starts in next year
W2: Inflate Figures
T1 T2 T3 T4
Sales X*1% X*1%*1% …..... X*1%*1%....*1%
Costs X*1% X*1%*1% …..... X*1%*1%....*1%
Total X X X X
Tax @% (%) (%) (%) (%)
W3: Working Capital
T0 T1 T2 T3 T4
Opening (X)
Required (1) (2) (3)
Additional (1) - (X) (2) - (1) (2) - (3) 3
W4: DF
(if it changes duting the duration of the project)
T1 = 1/ 1+DF1
T2 =T1*(1/1+DF2)
T3 =T2*(1/1+DF3)
T4 =T3*(1/1+DF4)
Standard Deviation, Mean, Coefficient
In a normal distribution:
1. 68% of the data fall 1 SD above and below the mean
2. 95% of the data fall 2 SD above and below the mean
3. 97.5% of the data fall 3 SD above and below the mean
The CoV is SD/Mean, which is usedto compare the relative risk of competive projects
Exam Notes and Proformas
, · Interest cost is never included in investment appraisals as its included in the cost of capital (i.e., discount factor)
· Depreciation is not included in NPV schedules: it’s a non cash item
· Always check if figures are presented in real terms or money terms (i.e., inflated)
· Anything that its allocated is never relevant -> don’t include in NPV
· Irrelevant figures (i.e., paid either way) are not included in NPV
· Any tax allowable costs are deducted from revenue -> lower profit -> hence lower tax on profit charge
· Contribution = Profit
NPV proforma
T0 T1 T2 T3 T4
Investment (X)
Machinery X
Variable costs (W2) (X) (X) (X) (X)
Fixed costs (additional) (W2) (X) (X) (X) (X)
Sale proceeds (W2) X X X X
Tax on profit (W2) (X) (X) (X) (X)
Tax saving WDA (W1) X X X X
Working Capital (W3) (X) (X) (X) (X)
Cashflows (X) X X X X
2 way for the NPV:
(1) NPV excel formula
NPV = (DF%, T1-T4)+T0
(2) Find each period's PV and sum
DF X X X X X -> as calculated in W4
PV Cashflow 0 *DF Cashflow 1 *DF Cashflow 2 *DF Cashflow 3 *DF Cashflow 4 *DF
NPV = SUM of PVs
, Standard Workings
W1: Capital allowances
CT @ x%
Year 1 X
WDA (X) X
Year 2 X
WDA (X) X
Year 3 X
Disposal X <- no WDA in year of disposal
(X)/X X/(X)
Remember:
- If bought near year end -WDA eligible
- If bought at start of year -WDA starts in next year
W2: Inflate Figures
T1 T2 T3 T4
Sales X*1% X*1%*1% …..... X*1%*1%....*1%
Costs X*1% X*1%*1% …..... X*1%*1%....*1%
Total X X X X
Tax @% (%) (%) (%) (%)
W3: Working Capital
T0 T1 T2 T3 T4
Opening (X)
Required (1) (2) (3)
Additional (1) - (X) (2) - (1) (2) - (3) 3
W4: DF
(if it changes duting the duration of the project)
T1 = 1/ 1+DF1
T2 =T1*(1/1+DF2)
T3 =T2*(1/1+DF3)
T4 =T3*(1/1+DF4)
Standard Deviation, Mean, Coefficient
In a normal distribution:
1. 68% of the data fall 1 SD above and below the mean
2. 95% of the data fall 2 SD above and below the mean
3. 97.5% of the data fall 3 SD above and below the mean
The CoV is SD/Mean, which is usedto compare the relative risk of competive projects
