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Q159. (b) After 4th year of operation, continue to produce and sell for the foreseeable future.
I agree the answer calculate th PV of the cash flow in perpetuity, but why it multiplies the Discount Factor of the 4th year?
In the calculation of further 6 years Tax Benefit, it also need multiplies Discount Factor of the 4th year, why? It’s cash flow after 4th year.Multiplying by 1/r for the perpetuity gives the PV ‘now’ only if the first flow is in 1 years time.
Here the first flow is 4 years later (at time 5 instead of time 1) and therefore the result needs discount for 4 years in order to arrive at a PV now.The same applies to the tax benefit. Using the annuity factor only gives the PV ‘now’ if the first flow is in 1 years time.
I explain this in my free lectures (and in the free lectures on discounting for Paper MA (was F2), because this is revision from Paper MA).
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