Required:
（a） Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
（5 marks）
（b） Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability
（12 marks）
（c） Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:
Ⅰ. assets with replacement cycles of different lengths;
Ⅱ. an investment project has several internal rates of return;
Ⅲ. the business risk of an investment project is significantly different from the business risk of current operations.
（8 marks）
（25 marks）
2010 June Q3【Answer】
（a） Errors in the original investment appraisal
Inflation was incorrectly applied to selling prices and variable costs in calculating contribution, since only one year’s inflation was allowed for in each year of operation.
The fixed costs were correctly inflated, but included $200,000 per year before inflation that was not a relevant cost. Only relevant costs should be included in investment appraisal.
Straight-line accounting depreciation had been used in the calculation, but this depreciation method is not acceptable to the tax authorities. The approved method using 25% reducing balance capital allowances should be used.
Interest payments have been included in the investment appraisal, but these are allowed for by the discount rate used in calculating the net present value.
The interest rate on the debt finance has been used as the discount rate, when the nominal weighted average cost of capital should have been used to discount the calculated nominal after-tax cash flows.
【提问】关于inflation这一部分话是什么意思？
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