1 / (1 x (1 + 10%) ^ n) – is a discounting factor. Considering the fact that we expect to receive 5,000 each year, discount factor will also be different for each year: Year 1 – 0.909090909 Year 2 – 0.826446281 Year 3 – 0.751314801 Year 4 – 0.683013455 Year 5 – 0.620921323 Then each factor is multiplied by 5,000 for each year, then summed and it gives us the same 18,955.

Annuity factor, in contrast, already counts the fact that we receive this 5,000 annually for 5 years: =(1-(1+10%)^-5)/10%. Therefore it makes it way easier to calculate one factor and multiply it just one time.

Also factors are given in exam and they always should be used if there’s a need.

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munie says

Good day

May I please understand why in the computation of value in use we used 5000*3.791

and why did we not use the formula C(1+10%)^5

Thank you in advance for the answer

megaziz says

I believe we are discounting the future cash flows to present value for the VIU. Your formula is based on inflating the value.

sagarsingh says

After using the given formula, I believe the answer still remains the same. They have directly given the annuity factor.

mariakurina says

1 / (1 x (1 + 10%) ^ n) – is a discounting factor. Considering the fact that we expect to receive 5,000 each year, discount factor will also be different for each year:

Year 1 – 0.909090909

Year 2 – 0.826446281

Year 3 – 0.751314801

Year 4 – 0.683013455

Year 5 – 0.620921323

Then each factor is multiplied by 5,000 for each year, then summed and it gives us the same 18,955.

Annuity factor, in contrast, already counts the fact that we receive this 5,000 annually for 5 years: =(1-(1+10%)^-5)/10%.

Therefore it makes it way easier to calculate one factor and multiply it just one time.

Also factors are given in exam and they always should be used if there’s a need.

jaymzo says

Your Value in use (5000*3.791)=18,955

chichi2018 says

what about the cost of capital at 10 % do we just ignore it ?

ajayf says

what about the cost of capital 10%

anamazingorange says

18955, not 18995. at 9:48

zeddjayy says

how is the depreciation 5,000?

eustacia says

25000 is dep for 5 years, 5000 is dep for 1 year. we take dep of only 1 year as the reporting period is of 1 year.