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I just wondering how to get the terminal value of property from the Q1<1> answer ,the exact number is 8,915,309. Would you pls tell me how to get that no, and the rate it used? thanks a lot.
Hi there, i’m not tutor. but i saw tutor’s reply on the same topic posted by a student a year ago. Here is the tutor’s answers.
The way it is calculated is as follows:
Property prices are rising at 8% pa in real terms. There is general inflation of 2.5% p.a. and so the actual price increase will be (1.08 x 1.025) – 1 = 10.7%
There is 5 years inflation, and so the value of the property will be:
6.2M x (1.107)^5 = 10306941There is to be a charge for repairs and renewals of 1.2M at current prices.
So this will inflate at the general rate of inflation of 2.5%, and because it is at current prices there will be 6 years inflation.This gives an actual cash flow of 1.2M x (1.025)^6 = 1391632
So….the net actual (nominal) cash flow is 10306941 – 1391632 = 8915309.
Hope that helps! (It was bad of the examiner not to show the workings. BPP’s answer is different for just that bit, but there’s is wrong!)
Good luck
Why is the inflation for property value 5 years? Shouldn’t it be 6 years? Question stated that it will be built over 12 months to 31 dec2009. Which means property value should account for inflation starting from 1 jan 2009 – 31 dec 2014 (6 years) please correct me if I’m wrong.
The construction cost is estimated to be 6.2M payable in 1 years time – 31 Dec 2004.
(There is no mention of the estimated cost itself inflating).The sale proceeds will inflate and will be received on 31 Dec 2009, which is 5 years later that Dec 2004.
Hi sir,
Good day to you.
Can I know how they get the exchange rate for six years when exchange to euro to dollar.
And why the variable cost and fixed cost that were in current prices no need to inflated?
Looking forward to hearing from you.
Thanks.
To get the forecast exchange rates each year, you use the purchasing power parity formula on the formula sheet (and the workings are show in workings 2 of the answer).
The variable and fixed costs have been inflated. What the examiner has done in his answer is calculate the net cash flow in current prices (the real cash flow), and then inflated to get the actual (nominal) net cash flow. (The alternative would have been to inflate everything separately, but that would have taken longer. Since they were inflating at the same rate it is quicker to do them together.)
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