Osborne Books - Level 4 synoptic workbook, page 29, task 4

candybr2017

Hello, can anyone please explain the calcluation for task 4 in Level 4 synoptic workbook, page 29?
i don't understand why the cash flow amount has to minus 60K. The answer shows in the book for the cash flow in Y1 is (275k+50k-60k)=265K



I have attached the quesiton.

Thanks
Haili

Pian32

It's beacuse the £60,000 is overall irrelevant to the decision and is therefore not included in the considered cash flow.

If the plant is open:
£275,000 is made including £50,000 in management cost

If the plant is closed
The management cost still occurs and £60,000 is gained at another site.

Therefore cash flow
=£275,000 (made from being open) + £50,000 (cost occurs either way) - £60,000 (Income that would occur even if closed)

KasiaK

Hello, could anyone explain whether the 10% decrease is calculated from 265K or from 325k?
Photo of the answer highly appreciated. Thank you

BrNorton007

Thank you so much for sharing. It's very helpful for me.

Oniyama100

> @KasiaK said:
> Hello, could anyone explain whether the 10% decrease is calculated from 265K or from 325k?
> Photo of the answer highly appreciated. Thank you

Hi Kasiak, I have been struggling with this question and previous comments have been helpful.

The 10% is on the 265,000. It wouldn't be on the 325,000 because this amount is before the deduction for non-relevant costs of 60,000.

The way I handled it is by carrying over only 90% of each year's revenue to next year. E.g.

Y2 total = 265,000*90%=238,500
Y3 total = 238,500*90%=214,650
Etc...

This is also what the answer suggests.

I hope this is somehow helpful.

KasiaK

Oniyama100,

Perfect! Very helpful indeed! Many thanks for your prompt response.
Kasia