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In this question while calculating the discount factor from year 20×5 to 20y4, the annuity actor of 14.11 is being multiplied by 0.751 which is discount factor of year 3.Could you please explain why we did that. Thank you.
I assume that you are happy with the calculation of the 14.11.
Had the flows been from time 1 to time 30, then you would simply have multiplied by 14.11 and the result would have been the PV at time 0.
However the first of the 30 flows is actually at time 4 instead of time 1. i.e. they start 3 years late. So using 14.11 discount to a PV that is 3 years late as well. i.e. a PV at time 3 instead of time 0.
So to get to a PV at time 0 we need to discount the result for those 3 years,
In this ques how are we supposed to calculate sensitivity in percentages and values? Is there any formula that has been applied?
The sensitivity (in value) is the change in the the relevant flow that would result in a NPV of zero.
If it is wanted in % terms, then it is the NPV / PV of the relevant flow as a percentage.
If you are unsure about sensitivities then best it to watch the Paper F9 lecture on investment appraisal under uncertainty (because it is revision of F9.
I get the way we calulate sensitivity in percantage…But (for example) how has the examiner calculated sensitivity of construction costs in value in this question(seal island) ?
The way the answer is typed is a bit confusing.
If the construction costs got up by $100M (but you could use any figure – the end result would be the sale), then the change in the NPV would be (3 x 0.909) + (6 x 0.826) + (1 x 0.751) = 8.434
We need the NPV to change by $122.2M to fall to zero, which means that the total change in the construction costs has to be 122.2 / 8.434 = $14.49M
Since the question says that the change is proportional each year, then the actual cost in each of the three years should hopefully not make sense 🙂
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