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John i saw previous posts but i didnt find the solution related to this question.
John can you please explain how to calculate cash flows in infinity and please elaborate these terms a bit .CF for forseable future, and CF from year xx to infinity.
I have feeling like both are same but here workings are total different.
I understand every working till 117.3 pv from 1-5 years of Ramage.. Please explain how they calculate pv year 6 to infinity and PV of year 1 – 15 as well of manufacturing division.
Thanks in Advance.
To discount a perpetuity you multiply by 1/r where r is the discount rate.
This gives the PV provided that the perpetuity starts in 1 years time.If the perpetuity starts (say) in 6 years time, then because that is 5 years later than in 1 years time, multiplying by 1/r gives a PV five years later – i.e. at time 5, and therefore we then need to discount for 5 years to get a PV now.
Alternatively, (and it will give the same answer), you take the discount factor for the perpetuity (1/r) and then subtract the 5 year annuity factor (for years 1 to 5). This leaves you with the discount factor for 6 to infinity.
The examiner has done this question using the second way, but either way will give the same result (apart from rounding, which is irrelevant).
The Paper F2 lectures on investment appraisal will help you with this.
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