- This topic has 6 replies, 5 voices, and was last updated 11 years ago by
.
- Posts
Q4(a): For calculating the NPV of PDur05.
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.
Do you guys agree with me, and do you think we should lodge this argument to ACCA this paper’s examiner’s attention??
Hi,
If cashflow at the END of year4 is using” ^(-3)”, could you tell me what to use if cash flow on START of year4?
Thanks.
Danny, there is a fundamental assumption and a concept that I believe you have gotten all wrong;
Whenever it is stated that a cashflow has arisen at the END of a particular year, that means the cashflow is to be treated as occuring in that year (you can assume at the start of it!).
Thus the positive cashflow starting in year 4 through year 15 occurs for a total of 12 years. We use the annuity factor for 15 years multiplied by the discount factor 1.11^(-3) to discount the cashflow for these 12 years.
Hope this helped.
Danny,
I’m with in this qustion! 🙂 actually I have attempted P4 during December session, and lost my way at this moment. I even started to calculate then arrived to negative NPV, crossed outr my answer and started from the beginig. I failed that time. And it’s really pleasure to know that this is tricky not only for me 😉 Wish all of us pass it!
- You must be logged in to reply to this topic.