Doubting on the suggested answer for Q4(a) Dec 2012

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  • April 5, 2013 at 2:13 am #121531
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    dannyshao
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    Dear Sir:

    Last December exam, Q4(a) asked for calculating the NPV of PDur05.

    The suggested answer is:

    When calculating the PV of “the operating cash inflows commencing at END of year FOUR and last for 15 years”. The suggested answer is: $970,000 x 7.191 x 1.11^(–3),

    BUT I think it should be: $970,000 x 7.191 x 1.11^(–4), because the cash flow starts at the END of year 4, not START of year 4.

    Furthermore, if my opinion is correct (I do think so!), then the total NPV should be negative which will be -$122,000, not the suggested $383,000.

    Could you please have a quick review on this question?

    Thanks a lot for your time!

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