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if i read the question correctly, the initial investment was payable in the first year of operations and this is why in my NPV calculation i deducted the investment at year 1.
As i have read the answers published by ACCA they deducted the intial investment at year 0. Could you explain why that is so please. thanks.The time periods in NPV calculations, are points in time – not whole years.
Time 0 is today (the start of the first year). Time 1 is one year from now (the end of the first year/start of the second year). Time 2 is two years from now (the end of the second year/start of the third year).
This is important because when we discount we are accounting for whole years of interest.
So….the initial investment is made immediately – time 0.
We always assume (unless told differently) that operating flows (i.e. revenues and costs) occur at the ends of years. So the first years revenue and costs occur at time 1.
You should find the free lectures on this website will help you.
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