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Under the situation of capital rationing, there are 3 projects which all have a 4 years life: A with a NPV of $5700, B with a NPV of $3290 and C with a NPV of $4380. If any project, A, B or C, were delayed by one year.(cost of capital @10%?
According to the BPP textbook, in illustrating postponing project, the NPV of $5700, $3290, $4380 respectively are all “NPV of year 1″!! ?page 218) BUT WHY?
Since the the NPV were calculated by using the discounted CF within the project life to minus the initial investment, I suppose the NPV will be the year 0 value. Why is it become ” NPV in year1‘ and in order to calculate “NPV in year 0” should divided $5700 by 1.1 ?equals to $5182)?and later loss in NPV become 518. A project with a life of 4 years divided by 10?! Why?
Thanks for your help.
I do not have the BPP textbook and so I cannot answer all of your question.
However if a project is delayed one year, then all of the flows will be delayed one year.
Discounting ‘removes’ the interest, but if all the flows are one year later then the NPV will also be one year later and there is therefore one more years interest to account for – that is why we need to discount by one more year at 10% (either using the discount factor from the table or dividing by 1.1 which is the same thing).
I can’t answer the last part of your question because I do not have the book.
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