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General Comments
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Congratulations to candidates who passed Paper F9 in December2010!Successful candidates demonstrated their wide understanding of the F9syllabus,since the examination paper covered many aspects of the syllabus.As inprevious examination diets,some very high marks were awarded.I hope thatunsuccessful candidates have learned from their experience and will besuccessful at their next attempt. 0ev='v8?
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Specific Comments +~"(Wooi
Question One ]wwN mmE
Most candidates gained good marks in parts (a) and (c),while part (b)was rarely answered well. S
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Part (a) asked candidates to calculate the net present value (NPV) ofProject A,allowing for inflation and taxation. M'VJE|+t
Most candidates inflatedcorrectly selling price,selling cost and variable cost in order to find thebefore-tax cash flows over the four-year appraisal period required by thedirectors of the company.Some candidates did not defer tax liability by oneyear,although the question required this.Some candidates calculated correctlythe tax benefit arising from capital allowances (tax-allowable depreciation),butdid not provide a balancing allowance in the final year,as the directorsrequired.The directors also required that scrap value be excluded from theevaluation. g
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The treatment of working capital was a problem for somecandidates.Three elements of working capital can be relevant in investmentappraisal,namely initial investment,incremental investment and recovery at theend of the investment project.The first two elements were needed here,withincremental investment arising from general inflation.Working capital recoverywas excluded by the directors’ views on investment appraisal.Even though workingcapital investment was specified in the question as an initial investment,somecandidates inflated the initial investment and placed it at the end of yearone. YjiMUi\V
The inflated after-tax cash flows were nominal (money-terms) cashflows and the question provided a nominal weighted average after-tax cost ofcapital.This was the discount rate needed for Project A,although some candidatescalculated another incorrect discount rate by either inflating or deflating thediscount rate provided. &