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Hello sir, when we are dealing with investment appraisal questions, do we assume the year of operation to be time 1 in both lease and buy situations?
We assume that the day on which the machine is bought or leased is time 0.
Therefore the cost of the machine when buying occurs at time 0.
As always in NPV questions we assume that operating flows occur at the ends of years unless told otherwise. Therefore the operating flows for the first year occur at time 1.
When leasing, the question will normally specifically say that the lease payments occur at the start of each year. In which case the flow for the first year occurs at time 0.
Definition-wise, does the year of operation mean the year in which operating flows occur?
The year of operation is the year in which cash flows are incurred.
However for NPV questions, when we discount we are looking at points in time that are 1 year apart and what matters is when the cash flow occurs. We assume unless told otherwise that the flows occur at the ends of each year, but we might be told they occur at the start of each year.
It does seem that you are not watching my free lectures because again I explain this in the lectures. You cannot expect me to type out all of my lectures here 🙂
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