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- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- May 23, 2016 at 8:51 pm #316701
Good evening…. the following question is very embarrassing …. i cant seem to get the annuity right!!!!
project has the following cash flows:
investments in the first 3 years as below. the labels “year 1”, “year 2”, “year 3” are exactly as given in the question.year 1 – (immediately) (2500)
year 2 – (1200)
year 3 – (1400)for the project’s inflow it says:
“annual operating cash flows commence at the end of year 4 and last for a period of 15 years. the annual cash inflows are 970. the required rate of return is 11%”
so i set it up as follows:
year——–0———–1————2———3-
———-(2500)—(1200)—–(1400)——-970 onwards
DF 11%—1———.901——-.812——–.731Now…AF 3-18 = AF3-15 – AF3
this factor will give me the PV at year 2 (which is actually yr 3) and then i will discount it at the DF for the year 2… my numbers are all wrongthe answer simply does the following:
PV of annuity=970 x 7.191 x .731
7.191 is the AF for period 15 @11%
how/why is he using this?
also, the Df factor shd be 0.812 since PV is at year 2
pls explain.
thank u
May 24, 2016 at 7:12 am #316743The end of year 4 is time 4.
So using the 15 year annuity factor gives a PV at time 3, which then needs discounting for 3 years.
May 24, 2016 at 4:41 pm #316854thank u
May 24, 2016 at 4:51 pm #316857You are welcome 🙂
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