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Hi,
could you please explain why the answer to this question, regarding the financing side effect, uses 3/97*80 for issue cost? why 97, it is clearly 3% of the gross finance.
secondly, when computing for annuity factor the answer uses the annuity of five years and then nets off the present value of year 1 to arrive at 4 years annuity factor. this results in different values from getting a direct 4-year annuity factor. why even go this long. I found the process odd and wish to know if this is the latest adjustment of how to approach questions of this style.thanks, john.
The finance required will need to cover both the cost of the investment and the issue costs. If the issue costs are 3% of the total finance that leaves 97% to be invested.
There is nothing new about the annuity factor – it has always been like this and is normal discounting. There is a 1 year delay in tax and therefore the tax savings are years 2 to 5 (not 1 to 4).
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